Volatility in financial markets

In 2022, following the contraction of world GDP in 2020 as a result of a generalized fall in economic activity in both developed and emerging economies, the effects of the war between Russia and Ukraine, the rise in prices and the impact on trade chains in Europe, will also be reflected in some Latin American countries.

Likewise, the crisis has triggered a contraction in international trade and, in turn, has led to sharp fluctuations in (high) prices as a result of volatility in the financial markets, which has translated into lower profitability and greater risk aversion.

In addition, the measures taken in the vast majority of countries around the world to contain the pandemic have had a significant impact on tourism and commercial aviation activities and restaurant and hotel services.

However, such measures implemented by some of the governments of Latin American countries to deal with the effects of the pandemic have helped to mitigate the economic impact on the social and business fabric of the region. The case of the fiscal monetary packages, for amounts close to USD 12 trillion in fiscal actions and USD 7.5 trillion in monetary action announcements, have cushioned the fall in economic activity, but this has also led to high levels of liquidity, which has had repercussions in the increase of indebtedness at a global level.

These disparities and asymmetries affect not only the dynamics of short-term growth, but also the capacity to sustain medium-term growth. According to International Monetary Fund (IMF) estimates, “the group of advanced economies is the only one that in 2022 would resume the growth trajectory registered before the pandemic, and even surpass it. The other groups of countries will remain, in the medium term (until 2025), on a much lower growth trajectory than projected before the pandemic”.

It is worth noting that during 2021, commodity prices continued the upward trend that began in May 2020, and are estimated to have grown by 42% over the 2020 average level. In 2022, prices are expected to remain high, although a slight decline (-3.2 %) compared to 2021 would be observed.

For the global economy, 2022 starts in weaker conditions as a result of higher energy prices and supply disruptions, inflation is higher and more widespread than expected, especially in the United States and in many emerging markets and developing economies. In addition, the ongoing contraction in China’s real estate sector and the unexpectedly slow recovery in private consumption have limited growth prospects.

International financial markets performed favorably in 2021, despite some brief episodes of increased volatilities linked not only to the evolution of the pandemic, but also to uncertainty about the inflation outlook and the possibility of early withdrawals of monetary stimulus. This has increased the likelihood that central banks in developed economies will reduce their monetary stimulus, which may have adverse effects on emerging markets.

The lower exchange rate corrections recorded in 2021 were also accompanied by lower volatility in the exchange rate, relative to the average absolute value of inter-daily exchange rate variations during the first three quarters of the year.