The World Bank has cut its 2026 growth forecast for Latin America and the Caribbean to 2.1%, down from 2.4% recorded last year, warning that the region faces a toxic combination of weak investment, tight fiscal space, and persistent productivity deficits that no amount of industrial policy can easily remedy.

The Washington-based lender, releasing its twice-yearly Latin America and the Caribbean Economic Update on April 8 ahead of its spring meetings with the IMF next week, projected that the region would again rank among the slowest-growing in the world, with GDP per capita growth barely registering. The outlook for 2027 offers only modest relief, with growth forecast to recover to 2.4%.

"Latin America and the Caribbean have the assets — and the reform capacity — to achieve far more," said Susana Cordeiro Guerra, the World Bank's vice president for the region. "The central ambition should be clear: create quality jobs that power growth and lift productivity."

The assessment marks a further deterioration from last year's already sobering picture, when the Bank similarly projected 2.1% growth for 2025 before revisions ultimately placed outturn at 2.4%. That report had flagged rising global uncertainties, delayed interest rate cuts in developed economies, and a deteriorating outlook for Mexico and Brazil as the principal risks. Many of those headwinds have since intensified.

Private consumption continues to underpin activity across the region, but its impulse is modest as real incomes recover only gradually and borrowing costs remain elevated. The binding constraint, the Bank argues, is investment: firms are holding back amid policy uncertainty, weak external demand, and financial conditions that remain tighter than before the pandemic. Conflict in the Middle East has compounded the challenge by pushing energy prices higher and introducing fresh inflationary risks that could delay monetary easing across the region.

Country divergence

Beneath the regional average, country trajectories diverge sharply. Argentina stands out as the principal upside exception. A front-loaded fiscal adjustment, moving from large deficits in 2023 to primary and overall surpluses, has helped compress sovereign risk and anchor inflation expectations. The World Bank now forecasts Argentine growth of 3.6% in 2026 and 3.7% in 2027, a striking turnaround from the contraction of 1.3% recorded in 2024.

"Argentina, as everyone knows, has had a long period of macroeconomic instability, with ups and downs that have simply been a barrier to any kind of growth," William Maloney, the Bank's chief economist for the region, told AFP. "If you have a macroeconomic crisis every 10 or 15 years, who's going to invest?"

The Bank attributes Argentina's improved trajectory to a combination of expenditure rationalisation, the Large Investment Incentive Regime targeting energy, mining, and technology sectors, a bilateral strategic framework with the United States on critical minerals, and the EU-Mercosur Partnership Agreement ratified by Buenos Aires. Downside risks, however, remain significant given the country's still-negative net international reserves and limited access to international capital markets.

Brazil and Mexico, the region's two largest economies, face considerably more difficult near-term prospects. Brazil is forecast to grow just 1.6% in 2026, cooling from 2.4% last year, as tight domestic financial conditions, high real interest rates, and a soft external environment weigh on credit and investment. Mexico's outlook is similarly constrained, with growth of just 1.3% projected this year as the fading impact of large public infrastructure projects coincides with persistent uncertainty around trade policy and the forthcoming review of the United States-Mexico-Canada Agreement.

Chile and Colombia are expected to grow 2.4% and 2.2% respectively in 2026, with both benefiting from the gradual normalisation of monetary conditions, though neither has escaped the wider regional malaise of subdued investment and weak productivity growth.

Industrial policy debate

The report's second chapter enters the revived global debate over industrial policy, noting that frustration with low growth rates has pushed governments across the developing world to reconsider a more active state role. The Bank observes that Argentina and Brazil have already deployed substantial industrial interventions in recent years, while Colombia and Mexico have increased trade-related protective measures.

Yet the report delivers a pointed verdict on the region's historical record. Across three distinct policy eras — the import substitution industrialisation period of 1965-89, the market-oriented reform period of 1990-2008, and the current phase of renewed experimentation — Latin America has consistently delivered lower growth and weaker productivity gains than Asia. "The overall performance of LAC has been disappointing in both interventionist and non-interventionist models," the report states.

Maloney framed the Bank's position as an argument for capability, not scale: "For Latin America and the Caribbean to increase growth and diversify its economies, industrial or productivity policies need to invest in the base: skills, openness, and strong institutions, the conditions that allow firms to place bets, innovate, compete, and grow."

The Bank identifies four priority areas: closing skills gaps through education, technical training, and management development; expanding access to finance and strengthening insolvency frameworks; deepening trade integration; and building institutional capacity to design and evaluate policy effectively. It cautions that governance indicators across the region have stagnated or deteriorated over the past 30 years even as Asian counterparts have improved.

Trade and fiscal pressures

On trade, the report highlights pronounced variation in how effectively Latin American countries have used preferential trade agreements to access global markets. Chile and Peru have secured preferential access to close to 90% of global GDP; Argentina and Brazil, constrained by Mercosur's customs union architecture, have coverage closer to 20%, though the newly approved EU-Mercosur agreement could materially improve that picture once fully implemented.

Fiscal pressures continue to weigh heavily on the region's room for manoeuvre. Public debt ratios have stabilised after the pandemic-era run-up but remain elevated by historical standards, and high interest payments are crowding out capital expenditure and social investment. The Bank notes that Brazil and Colombia still have real interest rates well above historical norms, while Colombia's central bank was compelled to raise rates even as peers were easing.

The region does possess strategic assets that the Bank argues remain underexploited. Latin America holds roughly half of global lithium reserves and a third of copper, alongside a comparatively clean energy mix. The report's authors suggest the energy transition amplifies the region's potential role in clean-technology supply chains, but caution that realising those gains will require the institutional and human capital foundations that have long eluded the region.