Global Insights

External conditions are bad for incumbents

The global economy remains resilient, but the risks are accumulating. The International Monetary Fund’s latest World Economic Outlook highlighted the global economy’s resilience and relatively benign growth projections, but also stressed risks of unsustainable fiscal dynamics, high energy prices and geopolitical uncertainty. Rising bond yields are increasing financing costs and currency pressures. Questions about the sustainability of large AI investments add uncertainty to U.S. growth and the equity rally.

Energy-driven inflation may prove more persistent than central banks expect. The effects of expensive energy are still being passed on to consumers and producers. There are few obvious paths to de-escalation of the Middle East conflict, while Trump’s diesel agreement with Russia appears insufficient to provide substantial relief and faces opposition in Europe, Ukraine and the United States.

Growth is not translating into a clear improvement in household living standards. Consumers feel pressure at the gas pump and in grocery stores, while producers face high fertilizer and other input costs. Even fossil-fuel exporters are constrained by these costs. In the United States, affordability concerns add to Republican vulnerabilities ahead of the midterms; Democrats are well positioned to perform strongly.

Reformist governments will face significant constraints, limiting their ability to deliver

Falling approval ratings reflect a difficult environment for governments across the ideological spectrum. Presidents throughout the region are seeing support decline. External shocks are arriving more frequently, while fragile political systems struggle to deliver. Governments elected on security promises increasingly face demands to address prices and economic insecurity.

Anti-incumbency and the political advantage of conservative issue agendas are operating together. Frustration with previous governments explains much of the regional shift, but rising concern about organized crime and public security also favors issues that conservative candidates tend to campaign on more comfortably. These advantages do not necessarily amount to a permanent cultural or ideological realignment.

Security promises could become a source of political vulnerability. Ambitious campaign pledges raise expectations for difficult-to-solve problems. Enforcement alone cannot address organized crime without complementary social and economic opportunities for vulnerable populations. Disappointment could eventually benefit centrist or more populist left-wing alternatives.

Crime, corruption, and inflation create competing demands that constrain reform. Polling shows corruption and security concerns alongside growing anxiety about prices. Governments attempting costly fiscal adjustments must also respond to those immediate demands. Argentina’s earlier crisis created greater tolerance for disruption than governments elsewhere can assume, and even Javier Milei’s ability to retain that tolerance faces an electoral test.

Oversight on U.S. deals will intensify, especially in Venezuela

A Democratic majority in either chamber would put investigations near the top of the agenda. Democrats are showing strong interest in investigating alleged corruption within the Trump administration and connecting oversight to the 2028 presidential campaign.

Venezuela could draw scrutiny from both Democrats and some Republicans. Cooperation with the Rodríguez administration has generated suspicion among Venezuelan and Cuban-American constituencies, including in South Florida. Concerns about corruption and collaboration with officials in Caracas could make Venezuela a major focus of congressional investigations, with potential support from some Republicans.

Bolsonaro remains slightly favored; reforms will face limits

Lula has regained momentum, while Flávio Bolsonaro remains a slight favorite. Lula has campaigned actively and announced initiatives to regain ground after the first round. Bolsonaro initially focused on formal alliances and potential cabinet appointments, appearing less active in public campaigning. He has lost some momentum since 4 October, without losing his underlying advantage.

The conservative congressional sweep may be motivating some voters to support Lula as a counterweight. Voters who abstained in the first round, including some with little enthusiasm for Lula, may be reconsidering the consequences of concentrated conservative power. This is a plausible explanation for the tightening, rather than a conclusively established shift.

Lula’s turnout challenge remains harder than Bolsonaro’s task of consolidating the right. Mobilizing voters who stayed home in the first round is difficult. Bolsonaro has a more direct route through supporters of eliminated center-right and right-wing candidates.

A Lula victory would produce a constrained presidency, but the outcome still matters greatly. The PL and its allies would retain substantial legislative power, leaving the PT weak and limiting Lula’s room to govern. The presidency would nevertheless continue to shape Supreme Court appointments, foreign policy, and trade policy. A Bolsonaro victory would offer a more favorable opening for reforms that have long been delayed.

The shorter-workweek initiative demonstrates the continuing appeal of parts of Lula’s agenda. Legislative progress toward reducing the six-day workweek has increased pressure on center-right politicians, including Bolsonaro, to support the change. This shows that the first-round result did not eliminate demand for labor protections and a stronger social safety net.

Warnings about spending cuts may be less effective than the argument for checks and balances. There has been limited detailed public discussion of Bolsonaro’s fiscal proposals.

Core social programs would be politically difficult for a Bolsonaro government to cut deeply. The working- and lower-middle-class voters who helped deliver the conservative victory would bear many of the costs. Bolsa Família and the SUS public health system are areas where major reductions would be especially difficult. Market-friendly signals and selected reforms remain likely, but profound fiscal restructuring faces political limits.

Administrative changes and narrower tax exemptions offer more plausible avenues for reform. Potential measures include making federal employment rules more flexible, containing payroll costs, reducing exemptions and restructuring selected ministries. These remain possibilities rather than a finalized policy program. They could improve investment conditions without directly reducing the social benefits on which the coalition’s voters rely.

Brazil cannot easily replicate the speed or mechanisms of Argentina’s adjustment. Inflation helped erode the real value of Argentine spending, alongside explicit cuts. Brazil’s inflation is much lower, and mandatory spending commitments limit the scope for a similar approach. Meaningful changes would require congressional action as well as agreement over who bears the cost.

The upside: Positive trends to watch

Global trade and economic activity have proved more resilient than expected. Protectionism and geopolitical conflict have not eliminated the need for complementary supply chains. Progress toward EU–Mercosur integration and recent EU–China understandings are signs that diversification and new arrangements remain possible, even as the multilateral trade framework evolves.

Mexico’s technology exports demonstrate the resilience of North American integration. U.S. demand for servers and other technology products is supporting Mexican exports and diversifying an export base traditionally associated with autos.

Mexico remains well positioned to benefit from geopolitical change and AI-related investment. Whatever the near-term risks to AI valuations, the technology is likely to remain a significant source of innovation. Mexico’s participation in these supply chains creates a substantial opportunity. Whether it realizes that potential will depend in part on domestic policy and the business environment.