World bank and Bank of Spain see retraction of roughly 8% this year, and rebound near 4% in 2021

Published on October 14, 2020

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The coronavirus pandemic has affected the economies of countries on all continents, and its aftermath will last thru the end of next year, according to two reports released last week from the World Bank and the Bank of Spain.

The World Bank estimates that the region’s economy will contract by 7.9% in 2020 due to the impact of the coronavirus pandemic. Most of this will be due to a drop in external demand and the collapse of tourism. They are also projecting a rebound for 2021 of 4%.

“The impact of COVID-19 has been felt through multiple channels, including external demand, increased economic uncertainty, the collapse of tourist flows, and the consequences of months locked in trying to contain the spread of the disease,” detailed the World Bank in its semi-annual report for Latin America and the Caribbean, published last Friday.

With an even worse projection, a consensus of analysts collected by the Bank of Spain—in a report published this Thursday—say the Latin American economy will collapse by 8.1%, this year, the greatest decrease in recent decades and above other emerging regions such as Eastern Europe (-4.4%) and Asia (-3%).

On a bright note, the World Bank also projects that in 2021, Latin American economic activity will grow by 4%, a promising percentage for a region which has been one of the most affected in the world by the health crisis.

In its forecasts, the World Bank expects the three largest economies in the region, Mexico, Brazil and Argentina, to also register significant declines this year, of 10.0%, 5.4% and 12.3%, respectively.

They say that these three nations will lead the regional recovery next year, according to estimates, as the Mexican economy is expected to grow by 3.7%, the Brazilian by 3% and the Argentine by 5.5%.

The report from the Spanish experts projects a similar rise next year. In 2021, they believe the region will return to growth with a GDP rebound of 4.1%, the same forecast for Eastern Europe but one point lower than that of Asia (excluding China), says the entity in its “Latin American Economy Report for the second quarter [of] 2020.”

The consensus forecast, which considered the six major countries in Latin America (Brazil, Mexico, Argentina, Chile, Colombia and Peru), also shows an uncertainty “much greater than in previous years,” which will cause a gradual and incomplete recovery, says the entity.

They believe that Argentina, Brazil and Mexico will not recover to the levels of activity they had prior to the coronavirus crisis until 2022.

Of the large economies considered, the Spanish experts say that Peru will be the one to fall the most this year—they are predicting 12.6%—and the one that grows the most in 2021, with a rebound of 9.9%.

And in their largest difference of opinion from the World Bank, they predict that the GDP of Brazil, the largest economy in the region, will fall by 11.7% in 2020. They do predict a nearly similar growth in 2021, with an increase of 3.2%. They also say that Mexico, the second in size of economy, will fall by 9.9% this year and will rise by 3.7% by the end of 2021.

Their forecast for Argentina’s retraction this year is only 11.7% as compared to the World Bank’s 12.3%, but their projection for growth in 2021 is also lower, at 5.1% versus 5.5%.

The Consensus Forecast also covered Chile and Colombia, who they expect to see a GDP decline of 5.9% and 6.8% respectively this year, and growth of 4.1% and 4.6% in 2021.

Social response

Faced with this massive contraction in growth in Latin America, the World Bank’s chief economist for Latin America and the Caribbean, Martín Rama, believes that local governments “must protect the most vulnerable while adapting health and safety standards in all sectors and activities, especially the education, so that the probability of contagion remains low while life continues.”

“Ensuring broad and affordable access to health care is critical to meeting this challenge,” he added.

Despite the direct impact of the pandemic, the World Bank pointed out that this crisis has come after years of slow economic growth and little progress in terms of social indicators, and immediately after a wave of social unrest in many countries in the region.

In addition, the impact of the confinement measures fell disproportionately on households with informal jobs, which reaffirms the need for policies aimed at promoting formalization, although without penalizing “the much-needed” job creation.

Despite the negative outlook, the World Bank stressed that “there are signs that the impact could be less serious than initially feared.” They say that world trade in goods has returned to pre-crisis levels and commodity prices have held up relatively well, after registering a sharp initial decline.

While the Spanish group says that even with the improvements that have occurred in matters such as the reduction of public debt, poverty and inequality, the countries of the region would benefit from the application of reforms to make their economy and investments more competitive in economy and infrastructure.

The World Bank published their report prior to the start of the joint Annual Assembly of the International Monetary Fund and the World Bank, which is being held this week, on a completely virtual format due to the impact of the pandemic.

Normally, the event of these multilateral organizations brings together the main world economic leaders and the Ministers of Economy and Governors of the Central Banks of the 189 member countries every year to analyze global challenges.

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