Latin America in a Global Context - Economic Briefing February 2008

Growth Prospects Stable Despite Softer Global Economy

In the United States, most observers are now expecting a sharp deceleration to dent economic growth this year. In fact, a recession may have already taken hold in the U.S., as the effects of falling housing prices, the sub-prime crisis and the ensuing credit crunch are being increasingly felt in the economy. However, authorities have reacted quickly, easing monetary policy aggressively and in February, the Bush administration put forth a sizeable fiscal stimulus package. Therefore, the slump should be rather short and mild. In Europe, recent indicators also support the notion of a slowdown, which is already underway. For the time being, monetary authorities have refrained from cutting interest rates but the latest developments seem to have softened the Central Bank’s position, which now suggests moderate rate cuts in the near future. The outlook for the Japanese economy deteriorated as wages declined at the fastest pace in more than three years in December and consumer sentiment dropped to a four-year low. The outlook for non-Japan Asia, in contrast, remains bright, as both China and India have developed their own dynamics and seem to be impacted less severely by slower global growth than previously expected by some observers. Finally, although the Latin American region is likely to grow at the slowest pace in three years, prospects for economic growth remain stable, as the region is benefiting from robust domestic demand. On a negative note, inflationary expectations are mounting, 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 holds despite global slowdown

With the latest data reports for 2007 coming in, the estimate for last year’s economic growth has been revised upwards a notch from the 5.1% projected last month to 5.2%.  In particular, the growth estimates for the two biggest economies, Brazil and Mexico, drove up the regional average, as GDP estimates for both countries were revised up by 0.1 percentage points.  According to this month’s poll, Brazil expanded 4.6% last year, while Mexico grew 3.1%.  This year, regional economic growth is likely to moderate but to remain healthy, supported mainly by robust domestic demand.  Exports, on the other hand, are likely to slow markedly amid waning global demand.  Consensus Forecast panellists have left their output growth forecast for Latin America unchanged at 4.5% for the third consecutive month.  Upward revisions to four of the seven major economies (Argentina, Brazil, Colombia and Peru) were sufficient to compensate for downward revisions to Mexico and Venezuela.  The growth outlook for one country, Chile, remained unchanged at 4.8%.  Argentina experienced the strongest upward revision, as panellists raised their GDP growth forecast by 0.3 percentage points to the current 6.1% projection, which puts the country in the position of the second-fastest growing economy in the region this year.  The recovery in Argentina from the devastating 2001-2002 crisis is now entering its sixth year and the strength and duration of the rebound have surprised most observers.  That said, GDP per capita in US$ terms still falls short of pre-crisis levels.  The second-strongest upward revision was experienced by Peru.  Consensus Forecast participants raised their forecasts by 0.2 percentage points to the current 6.9% projection.  Peru is set to become the region’s fastest-growing economy this year, supported by buoyant investment growth and robust consumption.  Next to Argentina and Peru, panellists raised their GDP forecasts for Brazil and Colombia by 0.1 percentage points.  As a result, the panel expects Brazil to expand 4.6% this year, while Colombia is likely to grow 5.4%.  On the downside, Consensus Forecast participants cut their growth projection for Mexico by 0.2 percentage points, expecting the economy to expand 2.9% this year.  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.  Finally, Consensus Forecast participants revised downwards the outlook for Venezuela by 0.1 percentage points to the current 6.0% estimate.  After being the fastest growing economy in the region for four consecutive years, the Venezuelan economy is likely to slow notably this year.  Several structural bottlenecks, including price fixing and capital controls, are prompting investment to decelerate, which, at the current juncture, seems unlikely to be compensated for by further oil price increases.

Inflation expectations continue to rise

Regional inflation in 2007 was revised downwards from last month’s 6.1% rate to the current 5.7% after the Venezuelan Central Bank changed its methodology to measure inflation, revising Venezuela’s inflation data back until 1999.  Owing to this modification, Venezuela’s 2007 inflation was revised down from 22.5% to 18.3%.  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 rising prices for oil and agricultural commodities will continue to exert pressure on consumer prices.  According to this month’s poll, average regional inflation will reach 6.2% by the end of the year, which is 0.2 percentage points above last month’s projection.  Five of the seven major economies registered upward revisions, while two countries, Colombia and Mexico, were unchanged.  For the second consecutive month, Venezuela experienced the strongest upward revision to its inflation forecast, as Consensus Forecast panellists lifted their estimate by 1.5 percentage points to the current 24.4%.  The panel seems to consider the recent measures applied by the Venezuelan government in order to contain price increases to be insufficient.  However, the recent change in the methodology to measure consumer prices could trigger downward revisions in the coming months in order to adapt expectations to the new figures.  The second-strongest upward revision was experienced by Chile.  Consensus Forecast participants raised their estimates by 0.3 percentage points to the current 4.2% projection, which is above the Central Bank’s 3.0% target but constitutes a notable deceleration in inflation after last year’s 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.  Peru also experienced a strong upward revision to its inflation forecast, as Consensus Forecast panellists lifted their estimate by 0.2 percentage points to the current 2.9%.  Currently, headline inflation is above the Central Bank’s 2.0% target and even exceeds the ±1.0% tolerance margin.  However, according to the Consensus, inflation will fall back within the tolerance margin by the end of the year.  Next to Venezuela, Chile and Peru, Consensus Forecast participants also lifted their estimates for Argentina and Brazil by a more moderate 0.1 percentage points.