Latin America in a Global Context - Economic Briefing April 2007

Increasingly Optimistic Prospects for Latin America

The global economy is headed for a moderate slowdown this year. The development of the U.S. economy during the next months will be pivotal, as forecasts oscillate from negative to positive reflecting the latest data releases. 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. The more pessimistic outlook is corroborated by a pronounced decline in consumer confidence, which suggests that U.S. consumers will constitute a less dependable support for global demand. In contrast, 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. In addition, the Japanese economy is growing at the fastest pace in three years, continuing the longest expansion since the end of World War II. Non-Japan Asia complements the picture of a strong global economy, as the region 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 supported by high commodity prices and strong domestic demand.

Prospects for Latin America improve

Consensus Forecast panellists continue to revise upwards the outlook for Latin American output growth this year.  This month, participants raised their forecast by 0.1 percentage points to the current 4.4%.  Upward revisions for four of the seven major economies lifted the regional growth forecast.  The outlook of two countries remained unchanged while one country (Chile) was revised a notch downwards over last month.  Brazil, Peru and Venezuela experienced the strongest revisions, as panellists raised their GDP growth forecast by 0.2 percentage points for the three economies.  According to the Consensus, the Brazilian economy will expand 3.6% this year.  A new methodology recently introduced to measure economic growth reveals a better-than-expected performance of the Brazilian economy during the last years.  As a result, both the Central Bank and Consensus Forecast participants are revising their GDP growth forecasts upwards.  Consensus Forecast panellists expect Peru to grow 6.8% this year, supported by strong domestic demand, which constitutes the main pillar of the current growth trend.  Simultaneously, Venezuela is anticipated to expand 6.6% this year.  Oil prices are expected to moderate, 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.  Finally, Consensus Forecast participants have lifted the GDP growth outlook for the Mexican economy by 0.1 percentage points over last month to 3.6%.  Despite recent signs of slower economic growth due to weaker demand from the United States, rising business confidence is likely to provide for a softer landing of the economy.

Inflation forecast remains stable despite increasing price pressures in Venezuela

While the growth outlook for Latin America continued to improve, the inflation forecast remained unchanged over last month’s 5.2% projection.  Downward revisions to this year’s inflation forecast for three major economies (Argentina, Chile and Peru) were sufficient to compensate for an important upward revision to Venezuela’s inflation forecast.  Colombia’s inflation also experienced an upward revision while inflation estimates for Brazil and Mexico remained unchanged.  Despite the recent drop in Venezuela’s inflation as a result of a recent cut in the value added tax, Consensus Forecast participants have lifted their inflation forecast by 0.7 percentage points to the current 18.9%, the highest inflation rate in the region.  So far, unorthodox policies employed by the government to contain inflation are proving ineffective in cutting back price pressures.  Next to Venezuela, Colombia experienced an upward revision of 0.1 percentage points in its inflation forecast.  Nevertheless, with a projected 4.3% rate, Colombia’s inflation will remain limited.  Argentina experienced the most important downward revision.  In spite of recent discrepancies between Argentina’s government, investors and worker’s union regarding the methodology used for the calculation of the consumer price index, Consensus Forecast participants have lowered their inflation forecast for this year by 0.3 percentage points, from last month’s 10.1% projection to the current 9.8%.  Thus, Argentina’s inflation forecast for this year returns to single-digits after exceeding the double-digit threshold for more than a year.  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 0.2 percentage points to the current 1.7%.