Latin America in a Global Context - Economic Briefing September 2007

Region Outlook Improves despite Mexico

Despite ongoing concerns that the subprime crisis will finally prompt the U.S. consumer to trim spending, the outlook for the global economy remains robust. In the United States however, a protracted slowdown appears unavoidable. While economic growth rebounded in the second quarter, the subprime mortgage rout has spread to the stock market and sliding consumer confidence suggests that tighter consumer spending will erode growth in the remainder of the year. However, other important economic areas are picking up the slack of a slowing U.S. economy. In Germany, the outlook is improving, as the country has recorded its first fiscal surplus since 1989 amid rising tax revenues. Simultaneously, in France, President Nicolas Sarkozy is proposing tax cuts to spur economic growth. Meanwhile, although the Japanese economy has slowed notably in the second quarter, it remains poised to continue the longest expansion since World War II. Furthermore, non-Japan Asia continues to grow at a resilient pace as the region’s leading economies have developed their own dynamics and are impacted less severely by the U.S. slowdown than expected by some observers. Finally, prospects for Latin America continue to improve, as better projections for the majority of the larger economies compensate for the deteriorating outlook for Mexico.

Outlook improves even though Mexican outlook drags down regional forecast

Consensus Forecast panellists have continued to revise the economic growth forecast for Latin America upwards.  Compared to last month, Consensus Forecast panellists raised their 2007 output growth forecast for the region by 0.1 percentage points to the current 4.8%, closer to the 5.2% expansion experienced by the region last year.  Upward revisions for five of the seven major economies lifted the regional growth forecast and more than compensated for a downward revision to one country (Mexico).  The outlook for Peru remained unchanged at last month’s 7.3%.  Peru constitutes one of the three fastest growing economies in Latin America and has experienced seventeen consecutive upward revisions to its growth forecast.  In August, however, the central coast of the Andean country was hit by the worst earthquake in more than 30 years.  While the quake’s impact on the entire economy is likely to be limited, since the affected area does not account for a significant part of the county’s GDP, the expected damages were sufficient to halt the series of upward revisions.  This month, Venezuela experienced the strongest change, as panellists raised their GDP growth forecast for the country by 0.4 percentage points to the current 7.4% projection.  Panellists revised their prospects for Venezuela’s economic growth, as second quarter GDP data came in ahead of expectations.  Moreover, with the price of oil at its current level, not even the approval of the populist constitutional reform proposed by President Hugo Chávez can derail the economy from its current path, at least in the short run.  Chile and Colombia experienced the second-highest upward revision to their GDP forecasts, as panellists raised their projections for both countries by 0.2 percentage points.  As for Chile, Consensus Forecast panellists anticipate that the economy will expand 5.9% this year.  The Chilean economy continued to show signs of a strong recovery in the second quarter, after the sub-par performance registered last year.  In addition, copper prices remain high, ensuring another year of healthy export growth.  In Colombia, participants expect the economy to grow 6.2% this year.  Recent data confirm that industrial production continues to expand at a double-digit pace, which will support economic expansion this year.  Finally, Consensus Forecast participants raised the outlook for Argentina and Brazil by 0.1 percentage points to the current 7.4% and 4.6% growth respectively.  On the downside, Mexico’s growth forecast suffered the fifth consecutive downward revision.  According to this month’s Consensus, the Mexican economy will expand only 3.2% this year, 0.1 percentage points below last month’s projection.  Despite having picked up somewhat in the second quarter, the weak growth figures confirm that the Mexican economy has been seized by an important slowdown.  Moreover, the outlook continues to deteriorate as the sluggish performance of the U.S. economy continues to hurt export growth and the manufacturing sector.

Strong growth continues pushing up inflationary expectations

As a result of better prospects for Latin American output growth, inflation expectations continue to rise.  According to this month’s poll, average regional inflation will reach 5.3% by the end of the year, 0.1 percentage points above last month’s projection.  A pronounced upward revision to the Chilean inflation forecast for the second consecutive month prompted the up-tick to the regional inflation forecast.  Moreover, Consensus Forecast panellists also lifted their projections for inflation in Brazil and Peru.  Inflation forecasts for two countries (Argentina and Venezuela) were revised downwards while two other countries (Colombia and Mexico) remained unchanged compared to last month.  Chile experienced the strongest upward revision to its inflation forecast, as Consensus Forecast panellists lifted their estimate by 0.7 percentage points to the current 4.5%.  Currently, headline inflation is above the Central Bank’s 3.0% target, which prompted the Central Bank to raise interest rates twice last month.  Owing to the surge in inflation, the Central Bank is expected to raise interest rates for the third consecutive time at its next policy meeting on 13 September.  Brazil and Peru experienced an upward revision of 0.1 percentage points to its inflation forecast.  Consensus Forecast panellists lifted their Brazilian inflation estimate to the current 3.7%, as headline inflation has been rising in the past months.  For Peru, Consensus Forecast participants expect headline inflation to reach 2.3% by year-end.  Peru’s headline inflation is currently at 2.2%, slightly above the Central Bank’s target of 2.0%.  Finally, Argentina experienced the strongest downward revision to this year’s inflation forecast.  According to this month’s Consensus, Argentina will post an inflation of 8.9% by the end of the year, which is 0.2 percentage points below last month’s forecast.  While changes in the methodology to measure consumer price variations earlier this year raise doubts about the validity of the inflation data, panellists nevertheless are adapting their forecasts to the reported numbers and continued to revise down Argentina’s inflation forecast for the seventh consecutive month.