Fresh Covid-19 wave will dampen Latam’s economic recovery

• The coronavirus (Covid-19) crisis is dampening first-quarter prospects. Several countries in Latin America are again grappling with a sharp rise in new cases. At the very least, the gradual easing of restrictions has been put on hold, and some governments have reintroduced tighter measures, mainly relating to movement and curfews, but with some more stringent lockdowns in badly affected regions.

• Key economic sectors will function better than in previous lockdowns, and the region will avoid the collapse in real GDP that took place in the second quarter of 2020. However, the spread of the virus—and generally slow progress in getting the vaccination process up and running—will weaken economic performance in the first quarter of 2021 (and possibly beyond). We continue to expect a more pronounced acceleration of the recovery in the second half of the year and in 2022.

The coronavirus picture across Latin America is mixed. The number of new cases has risen almost everywhere since December, with many countries battling a second (or, in some cases, a third) wave of the pandemic. In some countries, the second wave is not quite as bad as the initial wave in the second quarter of 2020 (including Argentina, Chile and Ecuador), but it has proven worse in others (Bolivia, Brazil, Colombia, Mexico and Peru). In terms of daily new cases, a number of countries are now reporting levels of about 200 per million population including Brazil, Argentina, Chile, Bolivia, Peru and Colombia (compared with almost 800 in the US at the peak of its second wave in January, although testing in the US is much higher). Reported cases in Mexico, Ecuador and Venezuela remain much lower (fewer than 60 per million population), but testing in those countries has been minimal, so the data are unlikely to reflect a probable increase in cases.

Fresh restrictions

Many governments have responded by reintroducing some of the measures that had been in place in 2020, in a bid to stop the virus from spreading. Some restrictions are relatively mild, targeted at reducing movement and social interaction. Argentina has introduced a ban on driving at night and has closed borders to non-resident foreigners. In Bolivia, there are restrictions on when people can drive (depending on number plate) and go out for grocery shopping and to banks (depending on personal identification numbers). Venezuela has put in place a “week on, week off” strategy, whereby some non-essential shops and services are closed for a week and then allowed to open for a week.

Governments in other countries have responded with tighter measures. In Peru, at the end of January the authorities unveiled a new quarantine in ten of the country’s 25 regions (including the capital, Lima) that is due to last at least until mid-February. In mid-January Chile’s government increased the number of municipalities under quarantine restrictions from 18 to 42 (accounting for over 20% of the population). Stay-at-home restrictions have also been introduced in some parts of Colombia’s capital, Bogotá, in response to soaring case numbers and intensive care departments that are nearing capacity.

However, one of the most notable features of these new restrictions is that governments remain much more reluctant to introduce the type of blanket lockdowns that were in place in many countries during the second quarter of 2020 (which contributed to a 13.6% quarter-on-quarter drop in regional GDP, excluding Venezuela). The introduction of new restrictions has happened relatively slowly, with authorities preferring to rely on less stringent measures and only introducing quarantines in targeted areas (and for a limited period), where intensive-care facilities in hospitals are particularly overstretched. Even in the case of Peru, Chile and Colombia—where restrictions are tighter—key sectors of the economy are permitted to continue operating. In Peru, for example, mining operations were scaled back sharply in the second quarter of 2020, but mining is operating as normal under the current lockdown.

Broadly speaking, sectors like mining, agriculture and construction that were affected in the first lockdown are less affected by current restrictions, and the definition of “essential retail” has become more flexible. Governments across the region are keen to maintain economic activity—and thus employment—as much as possible, in order to reduce the impact on overall performance.

Confidence takes a dive

That said, The Economist Intelligence Unit believes that the recent increase in cases across the region is likely to affect the pace of the recovery, at least in the first quarter of 2021. Rising numbers of coronavirus cases and tighter government restrictions tend to affect both consumer and business confidence initially, hampering private consumption and fixed investment, and dampening the labour market as firms become more reluctant to hire. This has already been evident in Brazil, where consumer and business confidence has been falling since September, and more recently in Peru, where confidence levels dropped sharply in January (broadly attributable to the impact of the second wave). Consumer confidence declined in Chile in December (January data are not yet available), although business confidence held up.

Our baseline forecast is that all this will have a moderate impact on real GDP in the first and/or second quarters of 2021, depending on the trajectory of the current wave of the pandemic. Data on the number of new cases seem to indicate that several countries reached a peak in mid-January (Argentina, Paraguay and Uruguay), others in late January (Chile, Colombia, Mexico and Peru), with numbers starting to edge down since then. The number of new cases in Bolivia, Brazil and Ecuador appears to have plateaued. Data from Central America and the Caribbean are less comprehensive but also suggest that many countries reached a peak of new cases in late January and that cases have been easing moderately since then.

However, these gradual declining trends have only recently taken hold, raising the risk of reversal if government restrictions are insufficient to slow the rate of transmission. On the basis that the current wave of cases continues to ease gradually, and that governments do not introduce more comprehensive lockdowns, we believe that real GDP will flatline or fall back only mildly in most countries on a quarter-on-quarter basis in January-March. Prospects for the second half of the year are firmer, and we are forecasting a more co-ordinated upturn across the region.

However, the weak start to 2021 will hamper the overall pace of the recovery; we are forecasting real GDP growth in the region of 3.9%, representing only a partial rebound after an estimated 7.3% contraction in 2020. Compared with other regions, Latin America’s recession was deeper and its recovery will be weaker. Some countries will fare better than others: Chile’s economy will recover fairly rapidly, reflecting a relatively rapid vaccine rollout and substantial scope for fiscal stimulus, although political risk related to the busy electoral calendar will constrain the recovery this year. Activity in Peru and Colombia—two of the region’s fastest-growing economies in the past decade—should also start to increase more rapidly than in the rest of the region (reflecting demographics and business environment advantages), after a first-quarter dip. That said, given that most of the region will experience a comparatively slow vaccine rollout, risks to our outlook appear weighted to the downside. If the current wave of the virus worsens again, or a subsequent wave takes hold before large numbers have been vaccinated, the recovery could stutter further.

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