Latin America in a Global Context - Economic Briefing December 2007

Outlook for Next Year Improves Despite Slower Global Growth

In the United States, economic growth remains robust for the time being, supported mainly by dynamic exports. However, a slowdown appears unavoidable, as the repercussions of the subprime crisis are spreading to the real sector. The deepening housing downturn and the persistent increase in gasoline prices have triggered a slide in consumer confidence, lowering it to the lowest level in two years, which threatens to erode consumer spending in the final quarter of the year. The softer economy and deteriorating credit markets are exerting increasing pressure on the Federal Reserve to ease monetary policy further. Meanwhile, the outlook for other important economic areas is also beginning to deteriorate. In Europe, leading indicators suggest that the economy may already be decelerating, and the outlook for the Japanese economy is worsening notably. 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 remain high, as some countries fail to reign in price pressures resulting from resilient domestic demand and external factors such as soaring oil prices.

Regional outlook remains stable

With less than a full month left until the end of the year, Consensus Forecast panellists have left their output growth forecast for Latin America unchanged at 4.9% for the third consecutive month.  The outlook for 2008, in contrast, improved a notch from the 4.4% expected last month to the current 4.5%.  Thus, the region remains poised for strong growth next year, despite the slowdown that most analysts expect to take hold of the United States.  Upward revisions to four of the seven major economies (Argentina, Mexico, Peru and Venezuela) were insufficient to compensate for downward revisions to Brazil and Chile.  The outlook for one country, Colombia, was unchanged at 6.6% growth for this year.  Argentina and Venezuela experienced the strongest upward revisions, as panellists raised their GDP growth forecast for both countries by 0.3 percentage points.  Consensus Forecast panellists anticipate that the Argentine economy will expand 8.0% this year, driven mainly by robust public and private spending.  Next year, Argentina will grow at a more moderate, but still robust, 5.7% pace.  In Venezuela, participants expect the economy to grow an even more robust 8.3% 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 2008, Venezuela will lose that position and will grow at a more moderate 5.9% clip.  Consensus Forecast participants also raised the outlook for Mexico and Peru by 0.1 percentage points.  Last month, panellists ended a string of six consecutive downward revisions to the Mexican outlook that lasted from May to October.  According to this month’s Consensus, the Mexican economy will expand 3.1% this year, well below last year’s 4.8% expansion but still relatively solid given the slump in the United States and Mexico’s dependence on the U.S. market as its main export destination.  However, the slump projected for the U.S. economy will limit Mexico’s growth potential in 2008, with growth revised downwards a notch over last month to the current 3.3%.  The forecast for Peru was lifted from the 7.5% expected last month to 7.6%.  Moreover, the country will continue to benefit from strong global demand for some key commodities and the panel lifted the outlook for next year from 6.3% to 6.4%, which puts the country in the position of being the region’s fastest growing economy in 2008.  On the downside, Consensus Forecast participants have cut their growth projection for Chile by 0.2 percentage points and now expect the economy to expand 5.3% for the full-year.  The outlook for the Chilean economy is deteriorating due to the slowdown observed in economic activity in the third quarter.  Next year, growth will moderate even further to 5.1%, which is down 0.1 percentage points from last month’s estimate. 

Inflation expectations stabilise

According to this month’s poll, average regional inflation will reach 5.5% by the end of the year, which is unchanged over last month’s projection.  In 2008, average regional inflation is likely to increase to 5.7%, which is also unchanged over last month’s projection.  This month, upward revisions for inflation in four major economies (Brazil, Chile, Peru and Venezuela) were fully compensated by a downward revision to the inflation projection for Argentina.  The inflation forecast for Colombia and Mexico remained unchanged over last month.  Chile experienced the strongest upward revision to its inflation forecast, as Consensus Forecast panellists lifted their estimate by 0.4 percentage points to the current 6.7%.  Currently, headline inflation is well above the Central Bank’s 3.0% target and, despite the continuous monetary tightening, officials have stated that the Bank will fail to meet its goal this year.  For next year, however, Consensus Forecast panellists expect inflation to moderate substantially to 3.5%.  Peru also experienced an upward revision to its inflation forecast.  Consensus Forecast panellists lifted their estimate by 0.2 percentage points to the current 3.4%.  Currently, headline inflation is above the Central Bank’s 2.0% target and even exceeds the ±1.0% tolerance margin.  Moreover, monetary officials have already stated that the Bank will fail to meet its inflation target this year.  Next year, however, inflation should fall back within the tolerance margin, with the year-end rate projected to be 2.6%.  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 8.6% by the end of the year.  Although changes in the methodology to measure consumer price variations earlier this year have raise doubts about the validity of the Argentine inflation data, the forecast adjusts to the official numbers and has dropped for the ninth consecutive month.  Nonetheless, other indicators such as supermarket sales suggest that actual inflation is considerably higher.  For next year, panellists see Argentine inflation rising to 11.5%, second only to Venezuela, that with a projected 20.8% year-end inflation rate is playing in a league of its own.