Latin America and the Caribbean entered 2025 with an unusual advantage: macroeconomic fundamentals are broadly under control. Inflation has eased, interest rates are stabilizing, and unemployment is at its lowest point in over a decade. Yet behind this façade of calm lies a deeper problem, low productivity, high labor informality, and underwhelming regional integration continue to weigh down long-term growth.

• Regional growth is projected at 2.4% for 2025, near the historical average but insufficient to reduce poverty or inequality.
• Public debt is stabilizing at around 60% of GDP, but fiscal space is limited due to persistent structural inefficiencies.
• Unemployment is at pre-pandemic lows, yet most new jobs are informal, offering little protection or upward mobility.
• Working poverty remains above pre-2020 levels, with food insecurity affecting 31% of the population.

A Fragile Recovery: Threatened by External Shocks

The region’s macroeconomic trajectory is exposed to major global risks, which, if realized, could cut regional growth nearly in half.

• Under a combined global shocks scenario, regional growth could plummet to just 1.1% (2025–2027).
• A U.S. recession would sharply affect Mexico (growth drops to 0.1%) and reduce regional growth to 1.6%.
• An oil price shock would disproportionately hurt Southern Cone exporters.
• A China slowdown has milder effects, but still poses downside risks for commodity-reliant countries.

Labor Markets: Employment Up, Job Quality Down

The region created 4 million jobs in 2024, but over half were informal.

• Informality is outpacing formal job growth, eroding productivity and social protections.
• Female employment growth now exceeds male, but remains concentrated in low-wage, informal sectors.
• Unemployment is down, but labor force participation has stagnated, especially among women.

Structural Barriers: Productivity and Public Spending

The IDB highlights two central bottlenecks for unlocking growth:

1. Labor informality:
   • Drags down productivity.
   • Shrinks the tax base.
   • Undermines public finance.
   • Full formalization could boost GDP by up to 19% in some countries.
2. Inefficient public spending:
   • Accounts for 4.6% of GDP in wasted resources.
   • Examples include overpriced procurement, untargeted subsidies, and rigid public wages.
   • Addressing this could expand fiscal space without austerity.

The Integration Problem: Trading Below Potential

Despite decades of trade agreements, LAC remains one of the world’s least integrated regions.

• Intraregional trade = just 15% of total trade, vs. 68% in Europe and 55% in Asia.
• Even Mercosur and CARICOM underperform in connecting regional value chains.
• Infrastructure gaps, rules-of-origin issues, and complex logistics remain major barriers.
• In agriculture, however, intraregional trade grew 5.6% (2017–2023), offering a glimmer of hope.

Green Energy, AI, and Gender Inclusion: Missed Megatrends?

The report identifies several transformational opportunities—but only if the region moves quickly:

• Clean energy transition could yield benefits equivalent to 20% of regional GDP.
• AI could raise labor productivity by 0.9 pp annually, but 84 million jobs are exposed to automation within a decade.
• Gender inclusion could add up to 20 pp to regional GDP if women's workforce participation improves in quality, not just quantity.

Key Takeaway

The region is stable, but stagnant. Latin America’s short-term resilience is commendable, but insufficient. With limited help coming from global markets, domestic reforms must carry the weight.

• Integrate the region, not just through trade deals but through real value chains.
• Tackle informality with labor reform, tax incentives, and skills training.
• Boost productivity by rethinking spending, embracing AI, and investing in women and youth.

Latin America’s window for transformation is open, but not indefinitely.