Latin America in a Global Context - Economic Briefing November 2007

Regional Outlook Stable despite Slower Global Growth

In the United States, economic growth remains robust for the time being, supported by exports, government spending and a rise in inventories. However, a slowdown appears unavoidable, as the repercussions of the subprime crisis are spreading to the real sector. The deepening housing downturn has triggered a slide in consumer confidence that is beginning to erode consumer spending. Moreover, the financial market jitters are also beginning to affect other important economic areas that have been providing a cushion to compensate for weaker U.S. consumption. In Europe, leading indicators suggest that the economy may already be decelerating. The Japanese economy seems to be rebounding, after the notable slowdown in the second quarter, but the recovery is unlikely to be sustained in the near term if the U.S. economy decelerates as expected. 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 less severely impacted by slower global growth. Finally, prospects for Latin America remain solid, but inflationary expectations are rising amid strong regional growth.

Regional outlook stabilizes

Following three consecutive months with upward revisions, Consensus Forecast panellists have left their output growth forecast for Latin America unchanged at last month’s 4.9%.  The outlook for 2008 improved a notch from 4.3% expected last month to the current 4.4%.  Thus, the region remains poised for strong growth next year, despite the slowdown that some analysts expect to take hold of the U.S. economy.  Upward revisions to six of the seven major economies were insufficient to compensate for a significant downward revision to one country (Chile).  The outlook for the Chilean economy is deteriorating amid an apparent slowdown in economic activity in the third quarter.  As a result, Consensus Forecast participants have cut their growth projection by 0.4 percentage points and now expect the Chilean economy to expand 5.5% for the full-year.  In contrast, Colombia and Venezuela experienced the strong upward revisions, as panellists raised their GDP growth forecast for both countries by 0.2 percentage points.  Consensus Forecast panellists anticipate that the Venezuelan economy will expand 8.0% this year, supported by soaring oil prices that continue to guarantee windfall profits.  Consequently, Venezuela will be, for the fourth consecutive year, the fastest growing economy in the region.  In Colombia, participants expect the economy to grow 6.6% this year, as prospects for domestic demand remain solid.  At 6.6%, Colombia will grow just a notch below the 6.8% expansion registered last year, which had marked a historic high.  On the downside, however, the ratification of the free trade agreement with the United States remains pending and, if the U.S. fails to approve the agreement, exports growth could suffer in coming years.  Finally, Consensus Forecast participants raised the outlook for Argentina, Brazil, Mexico and Peru by 0.1 percentage points.  In the case of Mexico, the revision puts an end to a string of six consecutive downward revisions to the Mexican outlook from May to October.  According to this month’s Consensus, the Mexican economy will expand 3.0% this year, well below last year’s 4.8% expansion but still solid given the slump in the United States and Mexico’s dependence on the U.S. market as a main destination for its exports.

Chile and Peru push up regional inflation forecast

Inflation expectations continue to rise amid higher price pressures in Chile and Peru.  According to this month’s poll, average regional inflation will reach 5.5% 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 fourth 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 Peru.  Inflation forecasts for one country (Argentina) were revised downwards while four other countries (Brazil, Colombia, Mexico and 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 0.8 percentage points to the current 6.3%.  Currently, headline inflation is well above the Central Bank’s 3.0% target and despite the continuous monetary tightening, the Central Bank revised its year-end inflation forecast, from the previous 2.8% estimate to 5.5%.  Moreover, monetary authorities have stated that inflation could surpass even the new forecast as price pressures continue to mount.  Peru also experienced a strong upward revision to its inflation forecast. Consensus Forecast panellists lifted their estimate by 0.5 percentage points to the current 3.2%.  Currently, headline inflation is above the Central Bank’s 2.0% target and even exceeds the ±1.0% tolerance margin by a notch.  Finally, Argentina experienced a downward revision of 0.1 percentage points to this year’s inflation forecast.  According to this month’s Consensus, Argentina will post an inflation rate of 8.7% by the end of the year.  Although changes in the methodology to measure consumer price variations earlier this year raise doubts about the validity of the Argentine inflation data, panellists keep adapting their forecasts to the official numbers and have lowered Argentina’s inflation forecast for the ninth consecutive month.