Economic and manufacturing indicators are softening in key Latin American countries as surging inflation, supply chain constraints, COVID variant concerns and lower demand restrict growth in the region. However, imports are on the rise, suggesting that many manufacturers are considering international sourcing to control production costs.

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Brazil’s manufacturing PMI fell month-over-month during October 2021, marking the slowest pace of expansion in 17 months as new orders contracted. Mexico’s manufacturing PMI increased month-over-month during October 2021 but remains at a rate of contraction.

Capacity utilization decreased month-over-month during September 2021 in both Brazil and Mexico as manufacturing output slowed.

Below is a chart showing October import levels for Mexico, Brazil and Chile. Imports to each of these countries increased month-over-month.

The annual inflation rate increased to 10.67% in Brazil during October 2021 as economic reopening, weaker currency, supply chain issues and severe droughts weighed on prices. Mexico’s annual inflation rate increased to 6.24% in October 2021 as costs surged for transportation and restaurants and hotels.

Currency values in Brazil and Mexico are volatile amid high inflation, a strengthening US dollar and concerns about the Omicron variant. The Brazil real traded around a four-week low of 5.68 in early December, while the Mexican peso slightly strengthened after hitting a 14-month low the previous month. Currency values are as of 12/1/2021.

Recent economic news points to softening economic and manufacturing activity within the Latin American region.

Mexico’s economy contracted 0.4% during Q3 2021, a slight slowdown compared to the previous quarter, according to data from Mexico’s National Institute of Statistics and Geography. Experts say that factors such as a COVID-19 case surge, supply chain disruptions and a law aimed at eliminating outsourcing contributed to the fall in economic activity.

Brazil’s economic activity contracted in Q3 2021, according to the IBC-BR economic activity index, which fell 0.27% month-over-month. Additionally, Brazil’s central bank revised down its August data to a 0.29% drop from a 0.15%. Experts say these numbers, along with a worsening inflation outlook, could signal that Brazil is experiencing a recession.

In late November, Mexico’s Economy Minister Tatiana Clouthier said she is working with the auto sector and the Canadian government to determine when to call for an arbitration panel to resolve a dispute with the U.S. over auto content rules. Mexico and Canada are seeking more flexible auto industry regulations in the United States-Mexico-Canada Agreement (USMCA), which the U.S. is not willing to compromise on, according to Clouthier, hence the need for a panel.

While inflation is on the rise around the world, Latin American countries are seeing a major inflation surge. Inflation rates are well-above central bank targets in several major economies in the region, such as Chile, Mexico, Brazil and Argentina. Analysts expect cost-of-living increases across Latin America to be above 10% for the year and for consumer price increases to extend well into 2022. As a result, several central banks are making some of the most aggressive rate increases in the world, but these rate increases are doing little to lower inflation, experts say.