Latin America in a Global Context - Economic Briefing October 2007

Region Outlook Improves Despite Slower Growth In The U.S. And Japan

In the United States, a slowdown now appears unavoidable, as the repercussions of the subprime crisis are spreading to the real sector. While economic growth rebounded in the second quarter, the subprime mortgage turmoil has prompted a credit crunch and triggered a slide in consumer confidence that suggests that tighter consumer spending will erode growth in the remainder of the year. So far, other important economic areas have kept up well but the financial market jitters seem to be taking their toll. In Europe, leading indicators suggest that the economy may already be decelerating, and the Japanese economy has slowed notably in the second quarter. In contrast, 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 slower global growth 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.

Downward revisions to Mexico dent increasing optimism for entire region

Consensus Forecast panellists continue 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 4.9%, just a notch below the 5.1% expansion registered last year.  Upward revisions to 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 one country (Chile) remained unchanged at last month’s 5.9%.  This month, Venezuela experienced the most significant change, as panellists raised their 2007 GDP growth forecast for the country by 0.4 percentage points to the current 7.8% projection.  Panellists continued to revise 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.  Argentina 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.  Consensus Forecast panellists anticipate that the Argentine economy will expand 7.6% this year.  Next to upbeat consumer and business confidence, recent industrial production data suggest that the resilient economic expansion observed in Argentina during the first half of the year will continue.  In Colombia, participants expect the economy to grow 6.4% this year.  Recent data confirm that industrial production continues to expand at a double-digit pace, which is supporting economic growth this year.  Finally, Consensus Forecast participants raised the outlook for Brazil and Peru by 0.1 percentage points to 4.7% and 7.4% growth respectively.  On the downside, Mexico’s growth forecast suffered the sixth consecutive downward revision.  According to this month’s Consensus, the Mexican economy will expand only 2.9% this year, 0.2 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, as the sluggish performance of the U.S. economy continues to hurt Mexico’s export growth and the manufacturing sector.

Chile continues to push up regional inflation forecast

Inflation expectations continue to rise amid better prospects for Latin American output growth.  According to this month’s poll, average regional inflation will reach 5.4% by the end of the year, 0.1 percentage points above last month’s projection.  This month, a pronounced upward revision to the Chilean inflation forecast – the third consecutive revision of more than 0.5 percentage points – prompted the up-tick to the regional inflation forecast.  Moreover, Consensus Forecast panellists also lifted their projections for inflation in Brazil, Mexico and Peru.  Inflation forecasts for two countries (Argentina and Colombia) were revised downwards while one other country (Venezuela) remained unchanged compared to last month.  Chile experienced the strongest upward revision to its inflation forecast, as Consensus Forecast panellists lifted their estimate by a full percentage point to the current 5.5%.  Currently, headline inflation is well above the Central Bank’s 3.0% target and despite the continuous monetary tightening executed by the Central Bank, monetary authorities recently revised their year-end inflation forecast, from the previous 2.8% estimate to 5.5%.  Peru experienced the second-strongest upward revision to its inflation forecast, as Consensus Forecast panellists lifted their estimate by 0.4 percentage points to 2.7%.  Currently, headline inflation is above the Central Bank’s 2.0% target but within the ±1.0% tolerance margin.  Moreover, annual core inflation remains well contained, hovering around the Central Bank’s target.  Consensus Forecast panellists also lifted their Brazilian inflation estimate by 0.2 percentage points to the current 3.9%, as headline inflation has been rising in the past months amid strong growth, fuelled by historically low interest rates.  Meanwhile, Mexico experienced an upward revision of 0.1 percentage points to its inflation forecast.  As a result, the panel expects Mexican inflation to reach 3.7% by year-end.  Finally, Argentina and Colombia experienced a downward revision of 0.1 percentage points to this year’s inflation forecast.  Colombia will post a year-end inflation of 5.1%, while Argentina will register an inflation of 8.8%.  Although changes in the methodology to measure consumer price variations earlier this year raise doubts about the validity of the Argentine inflation data, panellists kept adapting their forecasts to the reported numbers and continued to revise down Argentina’s inflation forecast for the eighth consecutive month.