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By Jamie McGeever
BRASILIA, May 19 (Reuters) - Latin America’s economy will shrink 7.6% this year in the steepest downturn on record and a return to pre-coronavirus crisis levels will take at least another two years, economists at Goldman Sachs said on Tuesday.
The COVID-19 outbreak and resulting social distancing policies have arrived late to the region, which together with a high degree of uncertainty over policy responses and their effectiveness, means the economic damage will be severe, they said.
“Our baseline now assumes that the bulk of physical restrictions on activity and social distancing protocols will remain in place through May, and will start to be gradually eased through June-July. This extension will generate a deeper and longer-lasting effect on real activity,” the Goldman economists wrote.
They also warned of the risk of “scarring effects,” such as long-term damage to the labor market and productive capacity of the economy, which could delay and undermine the eventual recovery.
Brazil’s gross domestic product, the region’s largest, is now expected to shrink 7.4% this year compared with Goldman Sachs economists’ previous forecast of a 3.4% contraction.
Mexico’s GDP is now expected to fall 8.5%, compared with 5.6% previously forecast, as is Argentina’s.
Goldman’s new forecast for Brazil is at the bearish end of the spectrum. The government recently revised its 2020 GDP outlook to -4.7%, and the latest consensus among economists in a weekly central bank survey is -5.1%.
The path to recovery will be slow and highly uncertain, in large part due to “significant uncertainty” over the spread of the virus and countries’ policy response and strategy to deal with the public health and economic challenges, Goldman said.
Using the fourth quarter of last year as a pre-crisis base, most economies in the region, with the exception of Chile, will not fully recover until 2022-23, they said.
Reporting by Jamie McGeever