Inmid-2020, at the height of the first wave of COVID-19infections, the IDBarguedthat the pandemichadparticularly devastating economic effects on Latin America and the Caribbean because ithadslammed the brakes on three flows that are fundamental to development: finances, people, andgoods. This is what economists call a triple sudden stop.
How is 2021 shaping up in these three areas? In this post, I argue that,although there aregroundsfor optimism and caution in each, the region cannot afford topursuea way out of the crisis that does not place export development at the heart of its strategy.
On the financial front, there are signs that restrictions around the world are easing. According to aFinancial Timesstudy using data from the Institute of International Finance, in the first few weeks of the year, investors seeking high returnsseem to havereturned rapidly to emerging marketeconomiesas a result ofmassiveliquidity injectionsfromcentral banks. However, growing risks of inflation in advanced economies, the possibility ofnormalizingtheirmonetary policies, and market overreactions are some of the factorssuggesting caution.Thequestionalsoremains as to how far Latin America will benefit from wagering on emerging economies and how investors will assess the region’smacroeconomic risksin the coming months.
In the real economy,people’smobilityis on the risein the regionand beyond, although it has yet to return to pre-pandemic levels. Greaterdomesticmovementsmay herald a recovery in economic activity, but itcouldalso increase thecontagionrisk.Recent analysissuggests that to date, countries in Latin America have been less effective than those in other parts of the world at implementing lockdown and reopening strategies that simultaneously reduce health and economic costs. The region has also beenslowwith vaccination roll-outs and may suffer the consequences of avirusmutation.
Therefore, in the coming months, the region’s economic growth will probably benefit more from the normalization of mobility in trading partners’economies than from greater internal mobility.
Exports, the key to recovery
Allthese factors suggestit is necessary tocarefullyconsider the prospects forimporting growth from the rest of the world through the trade channel. In the recently releasedTrade Trends Estimates for Latin America and the Caribbean, which draws ondataobserved up to September 2020 and projected through the end of the year, we reported that the export contraction for 2020 would range between -11.3% and -13.0%. More specifically, we confirmed that the rebound in exports lost momentum in the third quarter.In the same vein:what signs emerge from the most recent data?
Commodityprices are holding up the export performance,and theboomis expected to continue, for both short-term and structural reasons.With the notable exception of oil, commodity priceshaveweathered the crisis relatively well and began torallyin the last quarter of 2020. Supply and demand factorsarealigned todriveasurge in commodity prices this year.And experts are even debating whether we are on the brink of another structural supercycle powered bymassive, synchronizedinfrastructure investment programs around the world, the transition to a greener economy, and atrendtowardsthe depreciationoftheUSdollar.
These nominal variables have already impacted the region’s export values. According to the latestWorld Trade Monitor, the growth of Latin American export prices in the last quarter of 2020 (+8.4%) eclipsed both the average global performance (+4.0%) and that of emerging economies (+4.6%).
However, the signs are less encouraging when it comes to real flows. In October, the volume of world trade grew at a month-on-month rate of just 0.4%, a fraction of that observed in September (+2.4%), before picking up again in November, albeit at a lower rate (+1.6%), and then stagnating in December (+0.6%). Against this global backdrop, the month-on-month variation in Latin American exports was negative in October (-2.6%), November (-0.9%), and December (-0.5%). Moreover, the region is one of the few in which real export performance deteriorated steadily and the only onethat has fallenfirmly into the negative in the last quarter (-3.9%).
Looking ahead, the Purchasing Managers Index (PMI), a high-frequency leading indicator of the region’s trade performance, confirms a downward trendat the global level. However, it also provides some indication of which trading partners will be the most dynamic. The best news is coming from the globalflashindicator for theUnited States, which rose sharply in February (58.8). This acceleration was sharper than in January,suggestingthat private-sector confidence is on the rise.China’smanufacturing indexwas atits lowest pointin Februaryinthe last nine months (50.9), althoughitremainedon expansive ground, above the critical threshold of 50. In contrast, new lockdown measures inEuropekept theregion’soverall indicator for February in the recession zone (48.8).
Betting on trade, investment, and integration
Therefore, decision-makers shouldpromote the region's international insertion and integration strategy.
Thisincludes forging better linkages between the region’s economies and the United States, which is entering an expansionaryphase,taking advantage of new opportunitiesthatarisefrom strengthening regional value chains in the private sector; consolidating and diversifying trade relations with Asia, which is leadingglobalgrowth; and identifying new trade opportunities in Europe and Latin Americatotake advantage of theseregions’ potentialwhen current recessions end.
However,the history of the region indicates that thecommodity price boom may undermine the incentives foranew drivein reforms and investments to promote trade integration and competitiveness.Hopefully, this willnot be the case this time around when the commodity boomcoincideswithdeepeconomic, health,and social crises.
While it is timely fordecision-makers in the regionto focus onsaving lives in the short term, it is also vital for them to lay the groundwork for post-pandemic economic growth, employment, and poverty reduction. If thereisa time to promote integration and export development, that time is now.