Latin America in a Global Context - Economic Briefing July 2007

Outlook for Latin America Stabilizes Due to Deteriorating Prospects for Mexico

Even though the United States expanded at the slowest pace in four years during the first quarter, the global economy is headed for yet another year of robust growth, as other regions are picking up the slack. Moreover, recent developments in the United States suggest that the adjustments in the housing market will not trigger the sharp deceleration in consumption that some observers had feared. While consumer confidence is pointing downwards, Americans are not letting their concerns stop them from shopping and consumer spending remains robust. Furthermore, the U.S. economy is likely to accelerate in the remainder of the year, as businesses build up the inventories that have plummeted in the first quarter. Simultaneously, 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. Moreover, faster than reported growth in the first quarter indicate that the recovery in Japan – already the longest expansion since the end of World War II - is gaining momentum. Non-Japan Asia complements the picture of a strong global economy, as the region will continue to grow at a robust pace, driven by unrelenting growth in China and India. Finally, prospects for Latin America are stabilizing, as improving prospects for the majority of the major economies compensate for a deteriorating outlook of the Mexican economy, which is being affected by weaker growth in the U.S.

Latin American outlook stabilizes as Mexican outlook deteriorates

Despite upward revisions to the economic outlook for four of the seven major economies in Latin America, a downward revision to Mexico, the region’s second largest economy, was sufficient to impede a raise in the outlook for the entire region.  As a result, this month, Consensus Forecast panellists maintained the 2007 output growth forecast for Latin America at 4.6%.  Mexico’s growth forecast was revised down for the third consecutive month.  According to this month’s Consensus, the Mexican economy will expand only 3.3% this year compared to the 3.6% growth expected in April this year.  The Mexican economic outlook is deteriorating in the wake of disappointing growth figures for the first quarter.  In addition, Consensus Forecast participants anticipate that sluggish growth in the United States will have a more noticeable impact on the Mexican economy than previously expected, hurting Mexican exports and eroding growth in the all-important manufacturing sector.  In contrast, Brazil, Chile, Colombia and Peru experienced upward revisions to their GDP growth forecast.  Colombia experienced the strongest change, as panellists raised their GDP growth forecast by 0.4 percentage points.  Faster than expected growth in the first quarter prompted a more optimistic view on this year’s growth potential for Colombia, which is now seen to expand a healthy 5.8% this year.  Finally, Brazil, Chile and Peru experienced an upward revision of 0.1 percentage points to their GDP forecasts.  The estimates for Argentina and Venezuela showed no changes.

Inflation forecast remains stable

The inflation forecast for Latin America remained unchanged compared to last month.  In spite of downward revisions to the inflation forecast for the three major economies in Latin America (Argentina, Brazil and Mexico), a pronounced upward revision to the Venezuelan inflation forecast prompted the regional forecast to remain at 5.1% projected last month.  Moreover, Consensus Forecast panellists also lifted their projections for inflation in Chile, Colombia and Peru.  Having lowered the Venezuelan inflation forecast for two consecutive months, Consensus Forecast participants resumed the upward revisions on the Venezuelan inflation forecast this month.  According to this month’s Consensus, Venezuela will post an inflation rate of 19.0% by the end of this year, which is 0.8 percentage points above last month’s projection.  In spite of a reduction in the value added tax (VAT) from 11.0% to 9.0% in July, which constitutes the second tax cut this year, Consensus Forecast participants consider that this policy will only have a short-term effect, as the government continues to fuel the economy by passing on the windfall profits obtained in the oil sector.  Next to Venezuela, Chile experienced the second strongest upward revision to its inflation forecast, as Consensus Forecast panellists lifted their estimate by 0.3 percentage points to the current 3.2%.  Currently, headline inflation is above the Central Bank’s 3.0% target, which renders an interest rate hike increasingly likely.  Nevertheless, the Consensus Panel does not expect a moderation in inflation throughout the reminder of the year.  On the other hand, Argentina experienced the strongest downward revision to this year’s inflation forecast.  According to this month’s Consensus, Argentina will post an inflation of 9.3% by the end of the year, which is 0.3 percentage points below last month’s forecast.  Despite the controversy generated by the change in the methodology to measure consumer price variations earlier this year, panellists continued to revise down Argentina’s inflation for the fifth consecutive month.