Regional Economic Outlook: Western Hemisphere, October 2022

Navigating Tighter Global Financial Conditions
Recent developments in the Western Hemisphere - the United States/Canada and Latin America and the Caribbean - have been dominated by the impact of two distinct global shocks: the COVID-19 pandemic and then the Russian invasion of Ukraine. A third shock - the tightening of financial conditions - is now shaping the outlook.
Recent developments in the Western Hemisphere--that is, the United States/Canada and Latin America and the Caribbean (LAC)--have been dominated by the impact of two distinct global shocks: the COVID-19 pandemic and then the Russian invasion of Ukraine. A third shock--the tightening of financial conditions--is now shaping the outlook. After contracting sharply in 2020, most of the Western Hemisphere' economies recovered strongly in 2021 and early 2022, helped by the global recovery, the normalization of service sectors, and booming commodity prices. However, inflation pressures built up with pandemic-related disruptions, expansionary policies, rebounding demand, and the impact of the war in Ukraine on energy and food prices. The swift response of LAC's monetary authorities to rising inflation--well ahead of other economies--helped contain price pressures and keep long-term inflation expectations anchored, but inflation remains high. Amid global monetary and financial tightening, and the ensuing slowdown in global growth and softening of commodity prices, activity is expected to decelerate throughout the Western Hemisphere in late 2022 and 2023, while inflation pressures are expected to recede gradually. Downside risks dominate the outlook and stem from tighter financial conditions, a more pronounced global slowdown, and entrenched inflation. For LAC, a sharp fall in commodity prices and social unrest are important risks. With inflation yet to abate and most economies still operating at or near potential, monetary policy should avoid easing prematurely and must stay the course. Clear communication of policy intentions will be key to reducing uncertainty and keeping inflation expectations anchored. Fiscal support deployed to mitigate the impact of inflation on the most vulnerable should be accompanied by compensating measures, where fiscal space does not exist, but also support monetary authorities' efforts to tame inflation. Given rising financing costs, strengthening fiscal frameworks and advancing with inclusive fiscal consolidation--that protects key social objectives--will be essential to credibly putting public debt on a firm downward path while ensuring social stability. Boosting LAC's medium-term growth requires raising productivity and good-quality public and private investment. Supply-side policies should focus on strengthening human capital, simplifying and modernizing labour regulations, and lifting barriers to firm entry and exit.

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