General outlook: Lacklustre growth
In 2025, we expect Latin America to continue to grow at a pace close to the 2% trend as the disinflation process continues and central banks keep easing. However, we expect growth in the region to remain below the global trend.
The pace of growth in the region, both current and expected, varies from country to country. Brazil and Peru have seen strong growth in 2024, while Argentina’s has been negative and Mexico’s soft. In 2025, Argentina is expected to see the highest growth after two years of recession, supported by rising investment and consumption, falling inflation, and the implementation of reforms that should ultimately enable the gradual lifting of capital and FX controls.
The Mexican economy is expected to suffer from negative fiscal dynamics, deterioration in institutional checks and balances, and US tariff risks. Brazil should grow 2% y/y in 2025, with lower fiscal support and tight monetary policy set to be mitigated by a solid crop year and rising oil production. Chile and Colombia should each grow by about 2.4% y/y. We expect Chile’s economy to be supported by private consumption and looser monetary policy, but to be hurt by lower public spending due to fiscal rule requirements (despite it being an election year). For its part, Colombia should see economic activity supported by easing monetary policy and falling inflation, though fiscal challenges are set to persist and limit overall growth. The impact of US tariffs on Chile and Colombia will likely be felt via lower growth in China.
Inflation continues to fall
The disinflation process that started in 2022 helped by aggressive central bank tightening continued in 2024, although with some bumps along the way. Nevertheless, inflation remains above the central bank target in most countries, with services inflation remaining stickier than goods inflation. Headline inflation in the region was expected to end 2024 at 4.3%, falling further towards 3.4% in 2025. Core inflation also continues to fall, currently standing at 4%. This time last year we were expecting inflation to converge to target in 2025, but we now only expect that to happen in 2026.
Monetary policy normalisation should continue in 2025
The favourable disinflation dynamics and high central bank credibility enabled substantial monetary policy easing in 2024, except in Brazil, which started a hiking cycle in September to tame inflation and support the depreciating currency. Chile and Peru are quite advanced in their easing cycles and should reach a neutral policy rate sometime next year. Nevertheless, we expect central banks in the region to be cautious in terms of the speed and level of easing despite the still-high real rates given sticky services inflation, fiscal deterioration, some deanchoring in inflation expectations, high real wage growth, and potential upside surprises in both domestic and global inflation.
All in all, and barring unexpected developments, monetary conditions should become looser in the region, except in Brazil. For 2025, consensus expects central banks to cut their policy rates by 250bps in Colombia, 75bps in Chile, 100bps in Peru, and 150bps in Mexico. In Brazil, the hiking cycle is expected to continue, although analyst consensus and markets have different expectations. Analyst consensus expects hikes to continue until Q2 2025, peaking at 12.75%, and beginning to ease in Q3 2025. Markets, on the other hand, expect the hiking cycle to continue until at least July 2025, with the Selic rate (the reference interest rate for the Brazilian economy) reaching 15% and cuts only starting in 2026.
Currencies: Set to stay weak in 2025
Latin American currencies have weakened materially year to date, with the Brazilian real and Mexican peso (MXN) among the worst performers in emerging markets overall in 2024. Fiscal risks, institutional erosion, unwinding of carry trades (in the case of the MXN), and negative carry amid easing cycles weighed on performance. We do not expect 2025 to bring material catalysts for a reversal in performance, as lacklustre growth and falling inflation should allow for further easing (except in Brazil), while US tariff risks further heighten vulnerabilities. The MXN and the Colombian peso are most at risk.
Equities: Chile stands out as a bright spot
We downgraded Latin American equities to Neutral due to a significantly weaker fiscal outlook in Brazil as well as uncertainty around Mexico’s reform agenda and US trade relations. We expect further clarity and/or progress on these challenges by mid-2025, which could help rebuild investor confidence in regional stock markets. Chile stands out as a bright spot. We confirm our Overweight rating on the country thanks to high earnings growth, strong macroeconomic fundamentals, an expected favourable political shift later in the year, and high sensitivity to our constructive forecasts.
Conclusion: Neutral stance going into 2025
Modest growth, declining inflation, central bank easing cycles, demand for commodities, and a ‘soft landing’ of the US economy, along with continued easing by the Fed next year, bode well for Latin America in 2025. On the other hand, upside risks to inflation and higher-for-longer policy rates would hurt domestic growth, while weaker local currencies and a stronger USD would make the servicing of external debt more expensive. Overall, increased trade uncertainty due to upcoming US tariffs (especially in Mexico), political uncertainty, and deteriorating fiscal dynamics are expected to limit performance of Latin American assets in 2025.