Evolution and outlook for the U.S., Eurozone, and China: Mixed economic implications for Latin America

Authors¹:

Christian Alcarraz, FLAR, Bogotá, Colombia. – calcarraz@flar.net
Carlos Giraldo, FLAR, Bogotá, Colombia. – cgiraldo@flar.net
Andrea Villarreal, FLAR, Bogotá, Colombia. – avillarreal@flar.net
Liz Villegas , FLAR, Bogotá, Colombia. – lvillegas@flar.net

¹ The opinions and visions are the responsibility of the authors. They do not necessarily reflect the opinion of FLAR or its administrative bodies.

Throughout the year, the global economy has experienced a slight deceleration in growth compared to 2023, accompanied by inflation rates aligning more closely with target levels. This trend has enabled central banks in the Eurozone and the United States to initiate reductions in interest rates. For Latin America, this development has led to a decline in the prices of most commodities—although they remain elevated—while external financing costs have gradually decreased, particularly in the second half of the year.

The U.S. economy grew at an annual rate approaching 3%, demonstrating resilience despite a high-interest-rate environment. This strong performance was driven by robust consumer spending and increased public expenditure. In contrast, the Eurozone exhibited signs of fragility, with growth falling below 1%, primarily due to weakening private sector spending. Meanwhile, China reported growth below its 5% government target, hindered by subdued domestic demand and a persistent real estate crisis.

Labor markets in the U.S., Eurozone, and China maintained low unemployment rates, albeit with reduced dynamism. In the U.S. and Eurozone, unemployment rates edged higher, and job vacancies declined. In the U.S., the Beveridge curve suggests that the level of vacancies remains sufficiently elevated to prevent a significant short-term rise in unemployment (Figure 1). This indicates that while the U.S. labor market has lost some momentum, it continues to display resilience. Moreover, wage growth has sustained household consumption, mitigating part of the impact of elevated interest rates.

China’s economic slowdown, combined with global supply dynamics, has driven down most commodity prices in international markets (Figure 2). Notable declines in the prices of oil, soybeans, and iron ore over the year have negatively affected commodity-dependent economies like Brazil, Colombia, and Ecuador. In contrast, copper prices have followed an upward trajectory, reaching historic highs in the first half of the year, providing a boost to copper-exporting economies such as Chile and Peru.

Consumer inflation and the annual variation of core CPI continued to decline across the three economies, although in the U.S. and Eurozone, these metrics remain above pre-pandemic levels. The deceleration in service prices has slowed the pace of disinflation, particularly in the U.S. However, the current slope of the Phillips curve for the U.S. economy indicates that a significant rise in unemployment would not be required to reach the inflation target (Figure 3). In contrast, consumer inflation in China remained low, hovering around 0%.

With declining inflation, major central banks have begun reducing their policy rates. The European Central Bank has led the easing cycle with three consecutive 25-basis-point cuts to its policy rate. Similarly, the Federal Reserve initiated its rate reductions with a 50-basis-point cut, followed by a 25-basis-point reduction. Meanwhile, the People’s Bank of China lowered its 1- and 5-year prime rates to stimulate aggregate demand.

Recent reductions in international interest rates have contributed to lowering the cost of external financing. High-frequency data on non-resident portfolio flows indicate a significant increase in external capital inflows into the region in recent months (Figure 4). This trend has facilitated local central banks in lowering their policy rates, contingent on the behavior of inflation and its expectations.

By 2025, the U.S. and China are projected to experience slower economic growth compared to 2024, while the Eurozone is expected to experience a moderate recovery. The slowdown in U.S. GDP growth would mainly be attributed to a moderation in household consumption. This would occur in a context of greater adjustment in the labor market and a continued decline in private savings. However, our estimates indicate a conditional probability of recession of 10% over the next twelve months (Figure 5).

China’s economy is expected to grow below 5%, driven by weak domestic demand and the fragility of the real estate sector. In contrast, the Eurozone is projected to experience a slight acceleration in GDP, explained by a recovery in household consumption within a context of lower interest rates and improved private investment performance.
The low growth across these three economic areas would explain a decline in most commodity prices in 2025 (Table 1), assuming geopolitical conflicts remain at their current scale. Conversely, copper prices are anticipated to rise due to its intensive use in energy transition technologies .

Furthermore, the disinflation process is expected to deepen, accompanied by continued monetary easing (Table 1). Specifically, the Federal Reserve’s policy rate is projected to gradually decline throughout 2025, with a cumulative reduction of 100 basis points, reaching 3.5% by the end of the year (Table 1). Assuming geopolitical tensions and conflicts remain at their current scale, these lower international interest rates are likely to encourage greater capital inflows into the region. However, the disinflationary process could be disrupted or reversed by potential shocks of various types, which would, in turn, halt or reverse the decline in international interest rates.

The greatest source of global uncertainty in our projections arises from the policies of the new U.S. administration (e.g., trade, fiscal, migration, and regulatory policies) and their potential impact on trade, financial, and migratory flows to emerging economies and the region. Geopolitical risks also contribute significantly to this uncertainty.

In summary, the outlook for the U.S., Eurozone, and China collectively points to slower growth, continued disinflation, and lower interest rates. These developments have mixed implications for Latin America, affecting various components of the external accounts in the balance of payments, including prices, volumes, and interest rates.