Latin America in a Global Context - Economic Briefing January 2008

Regional Growth to Moderate amid Softer Global Economy

This year, global economic growth is likely to moderate, as the outlook for the United States, the Euro Area and Japan is deteriorating. In the United States, economic growth has remained robust for the time being, supported mainly by dynamic exports. However, a slowdown appears inevitable, as the repercussions of the subprime crisis are spreading to the real sector. In fact, several analysts are already expecting a recession to take hold over the U.S. economy. Softer growth in the United States and deteriorating global financial markets are exerting increasing downward pressure on other economic areas, including Japan and the Euro Area. In contrast, non-Japan Asia should continue 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, although the Latin American region is likely to grow at the slowest pace in three years, prospects for economic growth remain healthy, as the region is benefiting from robust domestic demand. On a negative note, inflationary expectations remain high, as some countries have failed to rein in price pressures resulting from resilient domestic demand and external factors such as soaring oil and food prices.

Outlook for this year remains stable

Last year, Latin America expanded 5.1% according to this month’s Consensus Forecast, just a notch below the 5.3% growth observed in 2006 and 0.2 percentage points above last month’s projection.  Upward revisions to two major economies, Brazil and Peru, were responsible for the improved regional outlook.  Higher commodity prices, along with robust domestic demand, drove last year’s expansion.  Venezuela, Argentina and Peru were the fastest growing economies, whereas Ecuador and Mexico expanded at the slowest pace.  This year, economic growth is likely to moderate but to remain healthy, supported mainly by robust domestic demand.  Exports, on the other hand, are likely to moderate markedly amid waning global demand.  Consensus Forecast panellists have left their output growth forecast for Latin America unchanged at 4.5% for the second consecutive month.  Upward revisions to four of the seven major economies (Argentina, Brazil, Peru and Venezuela) were sufficient to compensate for downward revisions to Mexico and Chile.  The growth outlook for one country, Colombia, was unchanged at 5.3%.  Peru experienced the strongest upward revision, as panellists raised their GDP growth forecast by 0.3 percentage points to the current 6.7% projection, which puts the country in the position of the region’s fastest-growing economy in 2008.  The second-strongest upward revision was experienced by Venezuela.  Consensus Forecast participants raised their forecasts by 0.2 percentage points to the current 6.1% projection.  After being the fastest growing economy in the region for four consecutive years, the Venezuelan economy is likely to moderate notably this year.  Several structural bottlenecks, including price fixing and capital controls, are prompting a deceleration in investment, which can no longer be compensated for by further oil price increases.  Next to Peru and Venezuela, panellists raised their GDP forecasts by 0.1 percentage points for Argentina and Brazil.  As a result, the panel expects Argentina to expand 5.8% this year, while Brazil is likely to grow 4.5%.  On the downside, Consensus Forecast participants have cut their growth projection for Chile by 0.3 percentage points and now expect the economy to expand 4.8% for the full-year.  The outlook for the Chilean economy has been deteriorating for the last three months due to the slowdown observed in economic activity in the second half of 2007.  Moreover, high inflation rates have forced the Central Bank to raise interest rates, which is further cooling the economy.  Finally, Consensus Forecast panellists have revised downwards the outlook for Mexico for the second consecutive month.  The panel expects the Mexican economy to grow 3.1% this year, just 0.1 percentage points above the estimate for last year’s expansion.  Prospects for Mexico remain uncertain, as the anticipated deceleration in the United States may trigger a significant adjustment in the important manufacturing sector and cause export growth to moderate notably.

Inflationary expectations on the rise

In December, regional inflation reached 6.1%, marking the highest year-end rate in the last three years.  Robust domestic demand, along with rising oil and food prices, prompted an upward trend in inflation during the second half of last year.  Venezuela and Bolivia experienced the highest inflation rates, above the double-digit threshold in both cases.  On the other hand, Ecuador, Mexico and Peru posted the lowest inflation rates, all three below 4.0%.  For this year, inflationary pressures are likely to persist in Latin America.  In fact, inflation expectations are on the rise, as robust domestic demand and external factors such as soaring prices for oil and agricultural commodities will continue to exert pressures on consumer prices.  According to this month’s poll, average regional inflation will reach 6.0% by the end of the year, which is 0.3 percentage points above last month’s projection and just a notch below last year’s inflation.  Furthermore, the seven major countries registered upward revisions in their inflation forecasts.  Venezuela experienced the strongest upward revision to its inflation forecast, as Consensus Forecast panellists lifted their estimate by 2.1 percentage points to the current 22.9%.  The panel considers the recent measures applied by the Venezuelan government in order to contain price increases and inflationary expectations to be insufficient, and sees inflation ending 2008 even above last year’s 22.5% inflation rate.  The second-strongest upward revision was experienced by Argentina and Chile.  In the case of Argentina, the panel forecasts an inflation of 11.9% by the end of the year, well above last year’s rate and 0.4 percentage points above last month’s forecast.  In 2007, Argentina registered an inflation of 8.5%, but official statistics were met with suspicion after controversial changes in the methodology for measuring consumer prices at the beginning of the year.  In fact, some analysts see actual inflation around 20.0% at the end of last year.  For Chile, Consensus Forecast participants raised their estimates by 0.4 percentage points to the current 3.9% projection, which is above the Central Bank’s 3.0% target but constitutes a notable deceleration in inflation after last year’s record 7.8%.  Last year, Chile posted the highest inflation rate in twelve years, more than doubling the Central Bank’s target.  As a result, monetary officials have been raising interest rates and inflationary pressures should subside again by the end of this year.  Next to Venezuela, Argentina and Chile, Brazil experienced an upward revision of 0.2 percentage points in its inflation forecast, while the three other major countries (Colombia, Mexico and Peru) experienced upward revisions of 0.1 percentage points.