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The outlook for the global economy remains
positive for this year but is showing signs of a slowdown in 2007. While oil
prices have declined amid abating tensions in the Middle East, the end of
the housing boom in the United States could weaken private consumption, one
of the key pillars of global consumption during the past years. In fact, the
U.S. economy is slowing for the second consecutive quarter. However,
consumer confidence is picking up again and could provide for a recovery of
consumption in the months ahead. Meanwhile, the Japanese economy is on track
to mark its longest expansion since the end of World War II and the economic
outlook remains robust. Moreover, non-Japan Asia will continue to grow at a
resilient rate, driven by the two leading economies of the region, China and
India. Finally, prospects for Latin America improve again, as the region
profits from a drawn out upward cycle in commodity prices. |
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2006
Outlook for Latin America remains unchanged but projections for 2007
improve
The
outlook for Latin American output growth this year remained unchanged over
last month, as upward revisions to four major economies were insufficient
to compensate for downward revisions to two countries. The outlook for
one major economy (Argentina) remained unchanged over last month. As a
result, the Consensus Forecast for GDP growth this year for Latin America
remained at the 4.6% expected last month. While the outlook for Latin
America has been stabilising during the past three months, the Latin
American region will experience yet another year of above average growth,
following on last year’s 4.0% expansion. In fact, apart from 2004, this
year’s growth rate would represent the highest since 1997. Moreover, the
Consensus panel is increasingly upbeat about the outlook for 2007, and
raised the growth forecast for next year by 0.1 percentage points over
last month to 4.1%. This month, the 2006 GDP growth prospects for
Colombia, Mexico, Peru and Venezuela are seen more optimistically.
Mexico, Latin America’s second largest economy, experienced a 0.1
percentage point upward revision to the 2006 GDP forecast. Consensus
Forecast panellists have continuously raised their forecasts for ten
consecutive months to the current 4.5% forecast, as the
economy is holding up surprisingly well against the slowdown that is
currently unfolding in the United States. However, most panellists expect
a notable slowdown next year, despite the newly inaugurated president
Felipe Calderón pledges to push important economic reforms in order to
provide the economy with renewed impetus. Colombia and
Peru are
profiting from strong commodity prices. Moreover, in Peru, the new García
administration is planning a strong increase in public sector investments,
which will boost growth in the coming years. As a result, Consensus
Forecast panellists lifted last month’s 2006 growth projection by 0.3
percentage points to 6.7% and the 2007 forecast by the same margin to
5.7%. Finally, Consensus Forecast panellists also lifted the outlook for
Venezuela by 0.6 percentage points from 8.3% expected last month to the
current 8.9%. Panellists are more optimistic about the Venezuelan
economy, as third quarter GDP data came in ahead of expectations. With
the oil price at its current level, not even the re-election of Hugo
Chávez on 3 December can derail the economy from its current path. On the
downside, panellists pared their outlook for Brazil and Chile. In Brazil,
economic data continue to surprise to the downside in spite of the ongoing
monetary loosening that has reduced nominal interest rates to the lowest
levels in 20 years. Panellists applied yet another 0.1 percentage point
downward revision to the GDP growth forecast for this year to 3.1%.
Chile experienced a 0.2 percentage point downward revision this month,
following signs that the economy is continually losing some of the
momentum that has been fuelling the current business cycle. Nevertheless,
with 4.7% output growth expected for this year, Chile will experience yet
another year of solid growth and will even accelerate to a 5.2% expansion
next year.
Inflation
remains a challenge in Latin America
Keeping
inflation under control remains a challenge in Latin America. By the end
of this year, the inflation rate for the Latin American region is expected
to reach 4.7%, which is unchanged compared to last month’s forecast.
Moreover, the region will make no progress in lowering inflation. To the
contrary, in 2007, the average regional inflation rate will rise to 5.0%.
Two of the seven major economies in the region, Argentina and Venezuela,
will record double-digit inflation rates this year. Next to traditional
monetary policy tools, both countries adopt unorthodox policies to contain
inflation. In Argentina, the government strikes deals with
major
companies to hold back price increases, whereas in Venezuela the
government employs exchange rate controls and intervenes less subtly into
the economy by outright price fixing for certain goods and services.
Nevertheless, with 15.5% year-end inflation this year in Venezuela and
10.0% in Argentina, both countries have the highest inflation rates in the
region. Moreover, both countries will see inflation rising at least
marginally next year. On the positive side of the inflation spectrum are
Peru and Chile with rates of 2.0% and 3.0% respectively. Next year, both
countries will remain at - or below - the inflation target rates set by
monetary authorities continuing the successful monetary policy in place
for several years. However, both economies are relatively small and carry
little weight in the calculation of the regional average. More important
for the inflation in the region are the developments in Brazil and Mexico,
which account for almost 70% of total regional output. Both countries
are moving towards a more controlled inflation environment. While Mexico
exceeds the long-term inflation target of 3.0% set by monetary authorities
with a projected year-end headline inflation rate of 3.8%, core inflation
develops at a more moderate pace and inflation will decline further to
3.5% next year. Brazil has made substantial progress in its fight against
inflation. Inflation dropped from 7.6% in 2004 to 5.7% in 2005 and will
reach 3.1% by the end of this year. However, the tight monetary policy
implemented by the Central Bank has contributed to stifle economic
growth. The Central Bank has loosened the reins in the past months to
revive the ailing economy, which will prompt inflation to rise to 4.0% by
the end of next year. |
