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May 2, 2025

Growth in Latin America (Latam) is forecast to remain subdued at 1.4% in 2025 and 2.0% in 2026 after a tepid 1.7% in 2024. Growth is weighed down at the start of 2025 by a slowdown in Mexico; growth is more stable in South America. A slowdown in growth abroad, notably in the world’s two largest economies � the US and China - is expected to weigh on exports from the region. The escalation of tariffs by the US was not as dramatic for most Latin American economies as it was for other parts of the world.

Financial market stability remains a concern for many of the region’s economies. A sharp depreciation in currencies could add to inflation risks and increase the costs of servicing debt for the most indebted economies. Argentina, Venezuela and Colombia are the most exposed to sharp moves in their currencies, though none are immune. High levels of uncertainty could stem the inflow of capital and foreign direct investment to the region. This is despite many economies in the region that will potentially benefit from the ongoing tensions between the US and China.

• Argentina: Argentina’s recent International Monetary Fund (IMF) deal and the move to loosen exchange rate controls to weaken the peso are signs that public finances may improve. However, inflation remains elevated and will need to come down further.
• Brazil: In the near term, the central bank is still weighing additional rate hikes to cool inflation pressures and assert its independence. However, weak growth will eventually win out and prompt a reversal in that stance; rate cuts are likely later in the year.
• Chile: A resurgence in core inflation and rising electricity prices could leave the central bank on the sidelines. The largest headwind is low copper prices; Chile is the world’s largest exporter of the commodity.
• Colombia: The debt-to-GDP ratio continues to rise. Progress on inflation has reversed, preventing the central bank from cutting rates.
• Mexico: As the most highly exposed country in the region to tariffs both in terms of reliance on US demand and the effective tariff rate, Mexico's economy has a high recession risk.
• Peru: Growth is expected to slow this year, but Peru is likely to remain an outperformer in the region.
• Uruguay: The central bank is expected to pause rate hikes now that inflation expectations are within target.
• Venezuela: Renewed sanctions could stunt investment and curb growth. 

Latam grew by an estimated 1.7% in 2024 with growth in the latter part of the year being much stronger than earlier in the year; consumer spending and policy easing in most countries drove that growth. Brazil, Mexico, Chile and Peru outperformed while Colombia lagged.

Latam’s outlook has remained steady through the first part of this year while the rest of the world has largely been revised down due to tariffs. That is more the case for South America; Mexico narrowly avoided a technical recession in the first quarter.

Growth is still expected to remain tepid over the next couple of years and could potentially be lower given slowdowns in Latam’s largest trading partners. That will stunt both economic and social development across the region.

Growth in the region is expected to slow throughout the year even as Mexico recovers from its slowdown. Latam economies have been contending with resilient consumers buoyed by wage increases. That contributes to overall price pressures, which reemerged in the back half of 2024. That inflation weighs on consumers at the same time that a spike in global policy uncertainty hampers investment.

Expectations of a global growth slowdown have impacted commodity prices. Futures for commodities mined in South America, like copper, have fallen. That could weigh on the Andean economies, particularly Peru and Chile, even if they see a pickup in demand from lower tariff rates. The copper mined in these countries constitutes inputs into high tech and green manufacturing. Brazil is exposed to commodity prices as well: indirectly through iron ore and through agriculture and oil exports.

The recent sell-off in the region’s currencies as financial markets digest changes in the trade landscape represents a downside risk to the forecast. Inflation pressures are still strong in Brazil, Colombia and Chile. Central banks will keep rates higher than otherwise. The exception is Mexico where the negative growth and employment impact of tariffs are likely to override any price impacts. 

Sweeping tariffs announced by the US on April 2 left Latam largely untouched. Mexico already had 25% tariffs implemented, but only on non-USMCA compliant imports. If no additional tariffs are levied on Mexico, most Latam economies face only the base rate of 10% after the pause on tariffs ends in July.

Latam faces one of the lowest effective tariff rates of any region. Additionally, exemptions for key exports like copper, semiconductors, energy and critical minerals cushion some of the region’s commodity exporters (though those exemptions could be short-lived).

That came as somewhat of a surprise to investors, who were expecting more tariffs on Mexico and less on the rest of the world, particularly because of the separate effort by the administration to stem migration from the region. The lower tariffs for the region mean retaliation is likely to be minimal.  

That raises the question: Is Latam set to benefit from the trade war? It is likely that sectors and businesses that can ramp up in the short term will benefit the most. Agriculture has anecdotally been called a winner. Exports from Brazil and Argentina to the United States have picked up, gaining market share from other countries. Factories in the region that were working at less than full capacity will try to increase production to meet demand given their new comparative advantage.

Even prior to this year, firms had more investments planned in the region. Some wanted near-shore production to make their supply chains more resilient. Others aimed to “friend-shore� to hedge geopolitical risk. The advantageous tariff structure for the region could rekindle those efforts.

However, a pickup in investment in new plants could be easier said than done. Uncertainty surrounding the tariff situation has left many companies paralyzed. Tariffs levied by executive order can be just as easily undone as they were signed. That means some will try to ride out the trade war and take on costs that they view as temporary.

The other challenge is that Latam does not necessarily have the capacity or infrastructure to meet the additional demand. Capacity utilization in Mexico and Colombia is near all-time highs and remains elevated in Brazil. Capacity would need to be expanded before a pickup in exports could materialize. That requires investment in the types of infrastructure required for the manufacturing base: Roads, water, power and shipping are all limited in various ways across the region.

The labor market is structurally tighter than it once was as the population continues to age. The aging population and lower birth rates dampen the size of the labor force, while human capital development and productivity lag compared to other regions. These factors limit investment.

The trade war does impact Latam indirectly as well. China is one of the largest trading partners for the region. (It is the largest for Brazil, Chile and Peru.) A slowdown in demand from China could have negative effects on the region’s exporters. An expected recession in the US could weigh on exporters who rely on US demand; Mexico and Central America are the most reliant on the US. Exporters could try to reroute to less affected regions like the EU, but that is unlikely to fill the void.

Latam countries have been particularly exposed to the chaos in financial markets after the new tariff announcements. With the exception of Mexico, most economies� currencies have weakened against the dollar. Tariffs tend to appreciate the currency of the country that is levying them; in the absence of a complete tariff reversal, the region’s currencies are unlikely to strengthen.

Currency depreciation tends to exacerbate inflation. Imports become relatively more expensive: Disinflation is exported while inflation is imported. Inflation pressures remain high in Brazil, Colombia and Chile even before tariffs. Mexico is within shooting distance of its target while Peru is comfortably within target.

Inflationary pressures from currencies and goods prices mean monetary policy is unlikely to loosen substantially. Brazil’s central bank could continue to hike while Colombia and Chile will have much slower descents. Peru’s slower pace of rate cuts comes for a better reason: stronger growth. Mexico is one of the only economies in the region whose central bank is expected to continue to cut rates; it could even increase the pace due to the expected slowdown in growth.

Higher inflation and interest rates put even more pressure on the fiscal situation in the region. Like many other countries, governments ran up large deficits during the COVID-19 pandemic that have been difficult to reverse. That leaves little room for maneuvering in the event of a downturn, which is becoming more likely as a result of tariffs.

Mexico, Brazil, Argentina and Colombia have attempted to rein in government deficits but that could be derailed if growth slows more than expected. A downside risk is that financial market volatility could lead to a spike in rates; that would further increase the debt burden in the region, potentially leading to fiscal stress or even default. Argentina has brokered another deal with the IMF, which could help stabilize the country barring a significant uptick in volatility in global financial markets.