Latin America in a Global Context - Economic Briefing March 2007

Prospects for Latin America Improve

The global economy is headed for a moderate slowdown this year. The U.S. economy mainly hinges on the impact of the bursting housing bubble on private consumption, which has constituted one of the key pillars of global consumption during the past years. However, consumer confidence remains above average, which could support consumer spending in the months ahead. In addition, the major European economies are strengthening and developments in France and Germany, which have dragged down economic growth in the Euro Area in the past years, are encouraging. Meanwhile, in Japan, the longest expansion since the end of World War II continues and accelerating growth towards the end of last year provides a solid backdrop for an ongoing recovery this year. Moreover, non-Japan Asia will continue to grow at a robust pace, driven by resilient growth in China and India. Finally, prospects for Latin America are more optimistic, as the region enters the fifth year of solid growth propelled by the drawn out upward cycle in commodity prices.

Consensus panellists raise growth outlook

The outlook for Latin American output growth this year improved by 0.1 percentage points over the past month’s 4.2% to the current 4.3%.  This month, an improved growth forecast for four of the seven major economies lifted the regional outlook.  The outlook of two countries remained unchanged and one country (Brazil) was revised downwards over last month.  Peru experienced the strongest upward revision to this year’s growth outlook, as Consensus Forecast panellists lifted the GDP growth forecast by 0.4 percentage points over last month’s projection to 6.6%.  Healthy and stable consumer confidence, together with lower unemployment, promises to buttress private consumption this year.  In addition, the García administration is planning to increase public spending in infrastructure projects, which will boost investments.  Colombia and Venezuela experienced a 0.2 percentage point increase in this year’s growth forecast.  After expanding at double-digit rates for three consecutive years, Venezuela will grow 6.4% this year.  Oil prices are expected to moderate this year, thus reducing the windfall profits that boosted the economy last year.  However, the government still commands sufficient funds to provide the population with additional income, which should support the domestic economy this year.  According to the Consensus, the Colombian economy will expand 5.2% this year.  Healthy consumer confidence as well as strong investment growth should fuel domestic demand this year.  Next to these three economies, Consensus Forecast panellists are more optimistic about the outlook for Mexico and have raised its 2007 GDP growth forecast from 3.4% expected last month to 3.5%.  The economy is holding up better than expected against the slowdown that is currently unfolding in the United States.  On the bottom end of adjustments to this year’s growth outlook is Brazil.  Panellists expect the Brazilian economy to grow 3.4% this year, which is down 0.1 percentage point from last month’s projection.  Apparently, the Central Bank’s monetary loosening that has reduced nominal interest rates to the lowest levels in 20 years is failing to revive domestic demand.

Inflation forecast revised downwards

According to this month’s poll, average regional inflation will rise to 5.2% by the end of the year, 0.1 percentage points below last month’s projection.  Three major economies (Argentina, Brazil and Peru) experienced downward revisions in their inflation forecasts for this year.  Simultaneously, Colombia, Mexico and Venezuela experienced an increase in their projections.  Meanwhile, Chile’s inflation forecast remained unchanged at last month’s 2.9%.  In spite of recent discrepancies between Argentina’s government, investors and worker’s union regarding the methodology used for the price index calculation, Consensus Forecast participants have lowered their inflation forecast for this year by 0.2 percentage points, from last month’s 10.3% projection to the current 10.1%.  Together with Argentina, Brazil and Peru experienced downward revisions of 0.1 percentage points in their inflation forecast.  Currently, Brazil’s inflation is at a seven-year low.  However, the Central Bank’s ongoing monetary loosening is likely to prompt inflation to pick up and end the year at 3.8%.  In the case of Peru, a stronger currency as a result of capital inflows entering the country is helping monetary officials to control inflation.  Therefore, Consensus Forecast participants lowered their inflation forecast by 0.1 percentage points to the current 1.9%.  On the other hand, Colombia, Mexico and Venezuela experienced an increase of 0.1 percentage points in their inflation forecasts.  While Colombia and Mexico will experience healthy levels of inflation, Venezuela will record double-digit inflation rates once again.  Next to traditional monetary policy tools, Venezuela makes use of unorthodox policies to contain inflation.  The government employs exchange rate controls and intervenes less subtly into the economy by outright price fixing for certain goods and services.  Nevertheless, with 18.2% year-end inflation projected for this year, the country has the highest inflation rate in the region and even exceeds last year’s level.