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COVID-19 Pandemic Will Lead to the Biggest Contraction in Economic Activity in the Region’s History: A -5.3% Drop in 2020

ECLAC released new growth projections for Latin American and Caribbean countries. It underscores that in the medium term, this crisis will provoke structural changes in the organization of production, international trade, and the current globalization model.

21 April 2020|Press Release

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Alicia Bárcena, Executive Secretary of ECLAC
Alicia Bárcena, ECLAC Executive Secretary, during the presentation of the report.
Photo: ECLAC

The coronavirus (COVID-19) pandemic is affecting the economies of Latin America and the Caribbean through external and domestic factors, the combined effect of which will lead to the worst contraction that the region has ever undergone, exceeding those seen in 1914 and 1930. According to the latest estimates, an average regional contraction of -5.3% is forecast for 2020, ECLAC indicated today while launching a new report.

The Executive Secretary of the Economic Commission for Latin America and the Caribbean (ECLAC), Alicia Bárcena, presented on this Tuesday, April 21, the COVID-19 Special Report No. 2, entitled Measuring the impact of COVID-19 with a view to reactivation, on tracking the economic and social effects of the current crisis stemming from the coronavirus’s impact in the region (the first edition of which was released on April 3). In a virtual press conference transmitted live from the United Nations regional organization’s central headquarters in Santiago, Chile, Bárcena also unveiled the new growth projections for each of the Commission’s member countries.

According to the report, before the pandemic hit, Latin America and the Caribbean had already accumulated almost seven years of low growth, with an average of 0.4% between 2014 and 2019. The crisis being experienced by the region in 2020, with an expected drop of -5.3% in GDP, will be the worst in all its history. To find a contraction of comparable magnitude, one must go back to the Great Depression of 1930 (-5%) or even further back to 1914 (-4.9%).

The document also explains that the coronavirus crisis has been transmitted to Latin America and the Caribbean through five channels: a reduction in international trade, a fall in commodities prices, the intensification of risk aversion and worsening of global financial conditions, lower demand for tourism services, and a reduction in remittances.

“The effects of COVID-19 will cause the biggest recession that the region has suffered since 1914 and 1930. A sharp increase in unemployment is forecast, with negative effects on poverty and inequality,” Alicia Bárcena said during her presentation.

“The region’s countries have announced important measures, which must be reinforced by expanding fiscal space. It is urgent for them to access financial resources based on the flexible support of multilateral financing organizations, accompanied by low-cost credit lines, debt servicing relief, and possible debt forgiveness. In addition, the region’s integration model and alternatives for recovery must be rethought in light of the structural changes that will occur to globalization and the world post-COVID-19,” the senior United Nations official added.

According to the breakdown in the projections, the organization forecasts that South America will contract -5.2% because several countries will be greatly affected by lower activity in China, which is an important market for their exports. Meanwhile, the decline in Central America is estimated at -2.3%, affected by a drop in tourism and reduced economic activity in the United States, which is its main trading partner and source of remittances. Finally, the Caribbean is seen contracting by -2.5%, due to reduced demand for tourism services.

The interruption of value chains caused by the pandemic will have greater impact on the Brazilian and Mexican economies, which have the region’s biggest manufacturing sectors.

Meanwhile, the value of the region’s exports is seen falling by around 15%. The biggest impact will be seen in South American countries that specialize in exporting commodities and are therefore more vulnerable to a drop in their prices. Meanwhile, the value of exports from Central America, the Caribbean and Mexico will suffer the impact of a deceleration in the United States’ economy. In addition, Mexico will be hit by the decline in oil prices.

The projections also point to a significant deterioration in labor indicators in 2020. The unemployment rate is expected to reach around 11.5%, marking an increase of 3.4 percentage points versus 2019 (8.1%). Thus, the number of unemployed persons in the region would rise to 37.7 million. Furthermore, the elevated participation of Small and Medium-sized Enterprises (SMEs) in job creation (more than 50% of formal employment) increases the negative impact, since this sector has been harshly affected by the crisis, while gender inequality will accentuate with measures such as school closures, social isolation and greater numbers of people who are ailing, since the burden of unpaid work borne by women will increase.

At the same time, the -5.3% drop in GDP and the rise in unemployment will have a direct negative effect on the income of households and on their possibilities for obtaining enough resources to meet basic needs. In that context, the poverty rate in the region is seen increasing by 4.4 percentage points in 2020, rising from 30.3% to 34.7%, which means that 29 million more people will find themselves in situations of poverty. Meanwhile, extreme poverty is seen rising by 2.5 percentage points, going from 11.0% to 13.5%, which represents an increase of 16 million people.

“The leaders of the G20 should be in favor of multilateral organizations making loans at favorable interest rates and alleviating the debt of countries that are highly indebted, deferring it or forgiving it. If that does not occur, the payments will be impossible and fiscal space will be compromised. Exceptional measures are required to confront an unprecedented crisis. There will be no progress without international cooperation and solidarity,” Alicia Bárcena underscored.

According to the report, this crisis in production will usher in changes that will outlast the health pandemic. Greater resilience in production networks will be needed, diversifying suppliers in terms of countries and companies, favoring locations that are closer to final consumption markets (nearshoring), and relocating strategic production-related and technological processes (reshoring). Companies are already adapting their internal operations to social distancing measures, accelerating the trend towards automation and digitalization, and an intensification of multilateralism’s fragility can be seen. ECLAC adds that while globalization will not be rolled back, there will be a more regionalized global economy centered around three poles: Europe, North America and East Asia.

“We must prepare for the post-COVID-19 world. We must think about the region’s future in the new economic geography given the elevated dependence on imported manufactured goods,” Bárcena indicated. “Industrial policies are needed that would allow the region to strengthen its production capacities and create new capacities in strategic sectors.”

“To have an impact in the new global economy, the region must move towards greater regional integration in terms of production, trade and technology. Our countries’ coordination on macroeconomic and production matters is crucial for negotiating the terms of the new normal, particularly with regard to an urgent aspect of the current crisis and in the medium term: the issue of financing for a new development pattern with equality and environmental sustainability,” ECLAC’s highest authority stated.