In the first quarter of 2025, economic conditions in the United States reflect a labor market showing mixed signals, alongside persistent inflationary pressures. This context may limit the Federal Reserve’s (Fed) room to cut its policy rate, suggesting a scenario of higher international interest rates for a prolonged period.
The global economy is undergoing a reconfiguration process that is characterized by growing geoeconomic fragmentation, which is defined as the tendency for trade, investment, and global value chains to divide into geopolitically aligned blocs.
Fiscal policy can significantly impact the rate of inflation in Latin American countries. Governments in the region have historically implemented procyclical fiscal policies, increasing spending and borrowing during periods of economic growth and tightening policies during recessions. This approach has contributed to volatility in inflation rates and economic instability.
In recent years, fiscal matters have taken center stage in both academic research and economic policy debates. This heightened focus is largely a consequence of the significant rise in public debt levels observed across advanced and emerging economies in the aftermath of the COVID-19 pandemic. At the same time, the sharp increase in inflation experienced in many countries led central banks to implement substantial hikes in policy interest rates.
Latin America faced a mixed economic outlook in 2024 amid a slight global economic slowdown driven by geopolitical tensions and uneven performance among major global economies. The region’s economic growth outpaced initial projections (2.3% compared to 1.8% forecasted), supported by resilient external capital flows, robust financial systems, and monetary policies that helped bring inflation closer to target levels.
Authors: Carlos Giraldo, Latin American Reserve Fund, Bogotá, Colombia. Email: – cgiraldo@flar.netIader…
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.
In the past three months, Latin America has faced reduced external and domestic financing constraints, supported by lower interest rates driven by easing inflation in most countries. This context has enabled us to revise the region’s annual growth projection to 2.1% for 2024. However, inflation remains above target in several countries, and public debt continues to rise as a percentage of GDP, underscoring the need for greater fiscal consolidation efforts. These efforts, however, will need to be tailored to the diverse economic conditions across the region.
The extractive sector holds great relevance for the macro-financial stability of Latin America. In most economies in the region, significant commercial and financial inflows originate from the extractive industry, and a portion of government income relies on the well-being of these companies, sourced either from the taxes paid by these entities or from the profits generated when the state owns a share of their assets.
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