U.S. headed for steep nosedive.  Anecdotal evidence from corporate earning reports suggests that the U.S. economy is headed for a steep nosedive.  Out of a total 1,080 companies that have issued profit forecasts so far, a record 756, or 70% percent, have said earnings would be worse than anticipated this year, according to Thomson Financial/First Call. The number of firms issuing profit warnings is the highest observed since the organization began tracking them in 1995.  Information technology capital spending seems to be the hardest hit sub-sector in the economy but, more importantly for Latin American economies, the manufacturing industry is also showing clear signs of contraction.  To make things worse, the U.S. Bureau of Labor Statistics reported on 6 April that employment declined by 87,000 in March in contrast to the expected increase of 50,000 jobs.  This was the biggest job loss since November 1991.  As a result, the unemployment rate rose 0.1 percentage points from February to a 20-month high of 4.3%.  While the unemployment figure is still low by historical standards, the release indicates that the economy weakened significantly in March and that, although the economy is likely to have remained in positive territory in the first quarter, economic activity may contract in the second quarter.  According to the Consensus, the economy will rebound in the second half of the year, although the number of sceptics predicting a longer slump is increasing.

Slump in U.S. economy further impacts outlook for Latin America.  The weaker than expected U.S. economy has prompted most panellists to apply further cuts to their economic growth forecasts for the Latin American economies for this year.  The GDP-weighted average of the seven largest economies declined again from last month, 0.5 percentage points below the forecast at the beginning of the year.  Despite the current crisis in Argentina, growth forecasts have been revised downward by only 0.1 percentage point compared to last month, since Argentina stands to benefit most from the lower interest rates in the U.S.  Mexico, on the other hand, suffered the largest cutback in growth forecasts and is now expected to expand by much more modestly this year.  Declining trade data suggest that Mexico will feel the full brunt of the lower U.S. demand and, while some cost conscious U.S. corporations may decide to move manufacturing facilities to the southern neighbour, the positive effects of the additional investments will only be felt in the medium to long term.  Panellists also pared down their growth forecasts for Brazil, amid concerns about potential spill-over effects from the Argentina crisis.  Finally, growth forecasts for Peru were downgraded a notch owing to continued negative data releases – the economy stumbled further in February – and an uncertain outlook for economic policy under a future government.  Forecasts for Colombia and Venezuela remained unchanged.

Elections and reforms.  Meanwhile, political issues have taken the centre stage in some countries.  In Peru, the 8 April presidential elections brought back an investor’s nightmare, former President Alan García, to the political arena.  Frontrunner Alejandro Toledo led García by 11 percentage points, according to preliminary results, but will face a runoff against García in a second round vote.  Markets have dropped in reaction to the result and the possibility, if small, of García becoming President will do little to calm investors.  In Mexico, the Fox administration submitted the long-awaited fiscal and financial reform package to Congress.  The bill, which forms the central pillar of President Fox's economic agenda, is highly controversial and is likely to face tough opposition in Congress, where the government lacks a majority.  In Argentina, Finance Minister Lopez Murphey proved to be short-lived and was relieved by former Economy Minister Domingo Cavallo, who upon assuming office announced a plan to jump-start the ailing economy.  Implementation of the plan will prove challenging, given the patchy relationship that Cavallo has with the governing coalition as well as the opposition Peronists and the lack of political cohesion within President De la Rúa’s own party.

Note:  The above text is an abridged version of the LatinFocus Consensus Forecast briefing for Latin America.  For more details please click here.

For five-year forecasts, please click here.