Region - Recession plus inflation

The region’s economic situation looks to worsen in the second half of 2022 due to a strong dollar, lower commodity demand, and continued supply chain challenges.

Copper prices have fallen and general economic outlooks are worsening for the region. Fears of a global recession and a significant slowdown in demand from China have dropped mineral prices across nearly all categories. 

The world has gone from a scenario of high commodity prices overall to a scenario in which high prices remain for only certain commodities. If there is a global recession in the coming 18 months, food prices may still remain high because demand will remain relatively constant, and there will continue to be supply shortages linked to both the Ukraine-Russia war and climate change. Energy demand could drop in a recession, but similar supply problems linked to Russian oil and gas could keep energy prices from falling back to 2019 levels. Copper prices, however, will almost certainly drop in a recession scenario, and there is nothing about the supply chain issues related to food or natural gas that would keep them artificially high.

For many South American countries—Chile and Peru, in particular—the drop in copper prices means weaker economies, less tax revenue and falling currencies. Meanwhile, those two countries are net importers of food and energy and are also facing high inflation due to general global issues.

Separately and partially related, the US dollar is booming, also impacting currencies across the region. This makes imports more expensive and debt harder to pay off.

This scenario of high food and energy price inflation, low mineral prices and global recession is a storm that could hit South America hard. Food producers like Brazil and Argentina could potentially manage to muddle through (though both are likely to suffer due to general economic mismanagement). But the net importers of food and energy are going to face all of the challenges and none of the benefits that usually come from a high commodity price environment.

At least in the cases of Chile and Peru, the political system has not acknowledged what this new economic environment means for policy plans. Boric is still pushing a mining royalty tax in Chile that won’t generate much revenue with copper prices down and could make mining less sustainable for some international firms. Meanwhile, Peru is still fighting over how certain mining royalties should be split between the national and local budgets without recognizing that mining royalties are going to drop and there won’t be money to split.

2022 was already a tough economic environment for many Latin American countries. The recent shifts in copper prices suggest it’s going to be an even tougher second half of the year.