Latin America in a Global Context - Economic Briefing December 2005

Continued Optimism for Japan Lifts Regional Outlook

Last year’s strong growth is giving way to a more moderate pace of expansion and next year growth is likely to slow down further.. However, even so, the global economy is expanding at a faster than average rhythm. In Japan, the outlook continues to improve amid signs that the strong growth at the beginning of the year is providing a solid backdrop for a more robust recovery than anticipated earlier. Moreover, the U.S. economy is accelerating in spite of the devastating storms in August and September. Moreover, consumer confidence that had plunged amid the sharp spike in gasoline prices has rebounded, which bodes well for the final quarter of the year. Meanwhile, the outlook for Latin America deteriorated slightly, as Brazil is developing far worse than anticipated earlier. That said, most economies continue to benefit from strong commodity prices, providing a solid backdrop for continued growth in the coming year.

U.S. industrial production rebounds

The economic data released since last month’s publication suggest a stronger than expected growth and have already prompted an upward revision to third quarter gross domestic product (GDP) growth from 3.8% reported in the advance estimates to 4.3%.  Moreover, the most recent data suggest that economic growth will remain robust in the final quarter of the year.  In October, industrial production increased 0.95% in seasonally adjusted terms over the preceding month, contrasting a 1.48% decline in September.  The rebound reflects hurricane-related recoveries in many industries even though some (mainly mining and petroleum refining) have not yet fully recovered.  Mining output dropped 0.5% after having fallen 8.5% in September and petroleum refinery output declined 1.8% after a 7.0% contraction in September.  The resolution of a strike at Boeing also contributed significantly to the increase in output, as it prompted a swing in aerospace production from a 19.3% contraction in September to a 25.9% expansion in October, as production bounced back to recover output shortfalls.  Manufacturing production increased 1.4%, a rise that more than reversed the 0.7% decline registered in September.  Capacity utilization for total industry rose 0.6 percentage points to 79.5%, a rate that is 0.3 percentage points above the year-earlier level but 1.5 percentage points below the 1972-2004 average.

Retail sales stronger than expected

Retail sales data also point to stronger than expected growth.  Even though retail sales in October dropped 0.1% over the preceding month, the reading exceeded market expectations, which had retail sales declining 0.7%.  In September, retail sales had increased 0.3%.  The main reasons for the slowdown were lower October auto sales after buyer incentives ended and lower service station receipts in the wake of declines in gasoline prices.  Excluding auto sales, retail sales rose a better-than-expected 0.9% amid strong building material, clothing and furniture sales.  The development of consumer spending in the all-important holiday season will hinge largely on consumer confidence.

Consumer confidence rebounds in September and October

In September, consumer confidence experienced the steepest drop in more than 25 years, followed by additional but more moderate deterioration in October, which had pushed consumer confidence to the lowest level registered in more than thirteen years.  However, in November, consumer confidence bounced back, as the University of Michigan’s index of consumer sentiment rose to 81.6 from 74.2 in the October survey.  The survey suggests that consumer confidence is closely tied to gasoline price developments.  In September consumer confidence plummeted, as gasoline prices spiked to new record highs in the wake of Hurricane Katrina.  As gasoline prices have fallen back again by almost a third, consumer spirits rebounded.  The strong bounce back in confidence bodes well for the holiday shopping season and should ease concerns about the outlook for economic growth in the final quarter of the year.  In fact, Consensus Forecast panellists have beefed up their estimate for fourth quarter again after lowering it last month amid the anticipated repercussions of the hurricanes.  The Consensus for fourth quarter GDP growth added 0.2 percentage points over the 3.3% November gauge and is thus just one tenth of a percentage point short of the pre-storm forecast levels.  Full-year growth is expected to come in at 3.6%, which is unchanged over last month’s forecast.  Next year, the economy is likely to continue the current growth pace with the Consensus Forecast expecting a 3.4% expansion, which is a notch ahead of last month’s projection.

Japanese economy moderates rhythm but remains above expectations

The series of upward revisions to the Japanese growth outlook observed during the past months continues, as recent data have given rise to hopes that the momentum from the strong recovery observed earlier this year is providing a solid backdrop for an ongoing recovery.  In the third quarter, GDP expanded at an annual rate of 1.0%, according to revised numbers reported on 9 December. The reading was revised downward substantially from the 1.7% reported previously.  Moreover, the third quarter reading fell well short of the 5.0% annual growth recorded in the preceding quarter (revised upwards from 3.3% reported earlier).  Quarter-on-quarter data corroborate the slowdown suggested by the annual data.  In the third quarter, GDP added 0.2% over the previous quarter in seasonally adjusted terms, just a quarter of the 1.2% quarter-on-quarter expansion registered in the second quarter of the calendar year.  The third quarter slowdown was broad-based as it reflected slower consumption and investment as well as a reduced contribution from the external sector.  Private consumption expanded 1.5% annually, just half the 2.9% expansion registered in the second quarter (Q3: +0.4% quarter-on-quarter in seasonally adjusted terms; Q2: +0.7% qoq s.a.).  Government consumption, in contrast, accelerated from 0.2% growth in the second quarter to 0.6% annual growth in the third quarter.  However, investment developed better than consumption, as gross fixed capital formation declined from a 5.7% expansion in the second quarter to 5.4% growth in the third, as businesses continued the spending pace to replace an increasingly old capital stock.  Finally, the external sector contributed negatively to economic activity in the third quarter, as exports expanded at a slower pace than in the second quarter while imports accelerated sharply. 

Outlook for Asia improves in spite of increasing inflation risks amid higher oil prices

Growth prospects for Asia continue to improve.  Following on last month’s 0.1 percentage point upgrade to this year’s economic growth forecast for the entire Asian region including Japan, Consensus Forecast panellists beefed up the outlook another tenth of a percentage point this month to 4.4%.  The regional average growth forecast for 2005 increased in spite of the temporary surge in oil prices in September in the wake of supply concerns related to the Hurricanes Katrina and Rita.  However, recent evidence suggests that economic growth in the major economic areas have not been derailed by the sudden spike in oil prices.  Moreover, consumer confidence that had experienced a bout of weakness amid the sudden increase in gasoline prices has bounced back, which suggests continued strong demand for consumer goods.  Given Asia’s function as a manufacturing hub for the global consumer goods industry, the region is set to profit from this trend, which is reflected in the recent upgrade. 

Growth outlook for Latin America remains unchanged as weaker Brazil weighs down on regional average

The outlook for Latin American output growth this year dropped over the past month, as upward revisions to four countries were insufficient to compensate for weaker prospects in two countries.   As a result, the Consensus Forecast for GDP growth in 2005 for Latin America declined from 4.1% expected last month to the current 4.0%.  Last year, Latin America expanded 5.9%, the strongest pace in more than a decade.  Prospects for next year remained unchanged at 3.9% growth.  The downward revision to the regional growth outlook was almost entirely motivated by deteriorating prospects for Brazil.  Since Brazil accounts for more than a third of total regional output, any downward revision is likely to show in the regional average.  Compared to last month, Consensus Forecast panellists sliced half a percentage point from the full-year projection for this year.  With less than a month to go before the end of the year, the downward revision is huge and was principally motivated by a much weaker than expected third quarter growth.  Apparently, the tight monetary policy mandated by the Central Bank in order to reduce inflationary expectations has served to suffocate domestic consumption, sending the entire economy in a tailspin.  Next to Brazil, the outlook for Chile dropped albeit only one tenth of a percentage point over last month.  Moreover, at 6.0% projected growth this year, Chile remains one of the fastest growing economies in the region.

Cyclical rebound persists in Argentina

On the positive side, Argentina experienced an 0.3 percentage point upward revision to the 2005 GDP forecast.  Consensus Forecast panellists raised their forecast for the seventh consecutive month from 7.7% expected in November to the current 8.0%.  Following on two years of strong growth, most economists had expected the growth pace to moderate, as the cyclical rebound from the preceding recession is drawing to an end.  However, even though economic activity added 8.8% in 2003 and 9.0% in 2004, the devastating recession that held its grip over the economy for full four years has provided for more cyclical recovery potential than anticipated.  Venezuela also experienced an upward revision to the 2005 GDP forecast, as growth estimates improved from 8.2% expected last month to 8.3% this month, the seventh consecutive upward revision, as the country is benefiting from high oil prices.