The economies of Latin America and the Caribbean will contract 5.3% in 2020 as the coronavirus outbreak affects countries’ GDPs. The forecast, if confirmed, would represent a record decline and could bring a serious social and economic crisis for the region, said the Economic Commission for Latin America and the Caribbean (ECLAC), a United Nations agency, in a new report.
The COVID-19 pandemic is affecting economies through external and domestic factors, the combined effect of which may lead to the worst contraction that the region has ever undergone, exceeding those seen in 1914 and 1930, during World War I and the Great Depression, when its countries’ economies shrank -4.9% and -5%, respectively.
In a virtual press conference held from the organization’s headquarters in Santiago, Chile, ECLAC’s executive secretary, Alicia Bárcena, said that “a sharp increase in unemployment is forecast, with negative effects on poverty and inequality”.
“It is urgent for countries to access financial resources based on the flexible support of multilateral financing organizations, accompanied by low-cost credit lines, debt servicing relief, and possible debt forgiveness. In addition, the region’s integration model and alternatives for recovery must be rethought in light of the structural changes that will occur to globalization and the world post-COVID-19,” the senior United Nations official added.
The list of the most severely affected countries include Venezuela (-18%), Mexico (-6.5%), Ecuador (-6.5%), Argentina (-6.5%), Nicaragua (-5.9%) and Brazil (-5.2%). Colombia (-2.6%) and Panama (-2%) may experience smaller downfalls. The disruption on supply chains caused by the pandemic will have greater impact on the Brazilian and Mexican economies, which have the region’s biggest manufacturing sectors.
Growth projections for 2020, by country
Even before the pandemic hit, Latin America and the Caribbean had already accumulated almost 7 years of low growth, with an average of 0.4% between 2014 and 2019. The document explains that the coronavirus crisis has been transmitted to Latin America and the Caribbean through five channels: a reduction in international trade, a fall in commodities prices, the intensification of risk aversion and worsening of global financial conditions, lower demand for tourism services, and a reduction in remittances.
According to the breakdown in the projections, South America will contract -5.2% because several countries will be greatly affected by lower activity in China, which is an important market for their exports. Meanwhile, the decline in Central America is estimated at -2.3%, affected by a drop in tourism and reduced economic activity in the United States, which is its main trading partner and source of remittances. Finally, the Caribbean is seen contracting by -2.5%, due to reduced demand for tourism services.
The projections also point to a significant deterioration in labor indicators in 2020. The unemployment rate is expected to reach around 11.5%, marking an increase of 3.4 percentage points versus 2019 (8.1%). The number of unemployed persons in the region would rise to 37.7 million. Furthermore, the elevated participation of Small and Medium-sized Enterprises (SMEs) in job creation (more than 50% of formal employment) increases the negative impact, since this sector has been harshly affected by the crisis.
At the same time, the -5.3% drop in GDP and the rise in unemployment will have a direct negative effect on the income of households and on their possibilities for obtaining enough resources to meet basic needs. In that context, the poverty rate in the region is seen increasing by 4.4 percentage points in 2020, rising from 30.3% to 34.7%, which means that 29 million more people will find themselves in situations of poverty. Meanwhile, extreme poverty is seen rising by 2.5 percentage points, going from 11.0% to 13.5%, which represents an increase of 16 million people.
“The leaders of the G20 should be in favor of multilateral organizations making loans at favorable interest rates and alleviating the debt of countries that are highly indebted, deferring it or forgiving it. Exceptional measures are required to confront an unprecedented crisis. There will be no progress without international cooperation and solidarity,” Alicia Bárcena underscored.
Some changes will be lasting
According to the report, this crisis in production will usher in changes that will outlast the health pandemic. Greater resilience in production networks will be needed. Companies are already adapting their internal operations to social distancing measures, accelerating the trend towards automation and digitalization, and an intensification of multilateralism’s fragility can be seen. ECLAC adds that while globalization will not be rolled back, there will be a more regionalized global economy centered around three poles: Europe, North America and East Asia.
“To have an impact in the new global economy, the region must move towards greater regional integration in terms of production, trade and technology. Our countries’ coordination on macroeconomic and production matters is crucial for negotiating the terms of the new normal, particularly with regard to an urgent aspect of the current crisis and in the medium term: the issue of financing for a new development pattern with equality and environmental sustainability,” ECLAC’s highest official stated.