Latin America in a Global Context - Economic Briefing March 2008

Outlook for Latin America Remains Stable

The global outlook is showing signs of weakness, as major economic areas are beginning to falter. In the United States, most observers are expecting a serious dent in economic growth this year, with some analysts even expecting an outright recession. 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 increasingly felt in the economy. However, authorities have reacted quickly. In January, the Federal Reserve eased monetary policy aggressively and in February, the Bush administration put forth a sizeable fiscal stimulus package that is likely to stimulate growth in the second half of the year. Nevertheless, the outlook for the U.S. remains subdued well into 2009. In Europe, recent indicators also support the notion of a slowdown underway. For the time being, monetary authorities have refrained from cutting interest rates but if the economic slump should deepen, they may opt for moderate rate cuts in the near future. The outlook for the Japanese economy also deteriorated as wages declined at the fastest pace in more than three years in December and consumer sentiment dropped to its lowest level in more than four years in January. Against this backdrop, although the Latin American region is likely to grow at the slowest pace in three years, prospects for economic growth remain stable, as the area is benefiting from robust domestic demand.

Political tensions between Colombia and Venezuela fail to unsettle regional outlook

With the latest data reports for 2007 coming in, the estimate for last year’s economic growth has been revised upwards from the 5.2% projected last month to 5.4%.  At that level, the region expanded at the fastest pace in more than 15 years notwithstanding 2004, when a strong bounce-back took place in Venezuela.  In particular, the growth figures for Argentina, Mexico, Peru and Venezuela drove up the regional average, as GDP estimates for these countries were revised strongly upwards over last month.  For this year, the regional prospects are less promising, as the downward effects from slower growth in the United States weigh on the outlook for the entire region.  That said, economic growth is likely to remain healthy, supported by robust domestic demand, which has developed its own dynamics.  Consensus Forecast panellists have left their output growth forecast for Latin America unchanged at 4.5% for the fourth consecutive month.  Upward revisions to one of the seven major economies (Argentina) were sufficient to compensate for downward revisions to Chile and Mexico.  The growth outlook for the remaining four major economies (Brazil, Colombia, Peru and Venezuela) remained unchanged.  In the latter case, while tensions between Colombia and Venezuela had raised concerns about a potential military conflict, most analysts interpreted the deployment of troops along Colombia’s border as mere sabre-rattling from former lieutenant-colonel Hugo Chávez.  Therefore, panellists maintained last month’s projections for both countries.  However, the long-term outlook for Venezuela is more sombre, as the Chávez administration fails to make the investments necessary in the oil sector to increase or even maintain the current oil output levels, thus undermining the country’s foundation of wealth.  Argentina experienced a notable improvement to its growth outlook.  Panellists lifted their 2008 GDP growth projection from 6.1% expected last month to the current 6.3%, in spite of looming energy shortages ahead of the approaching winter season.  On the downside, panellists pared the growth forecast for Mexico by 0.2 percentage points to a paltry 2.7%.  With more than 80% of total Mexican exports directed to the United States, Mexico is precariously dependent on the development of the U.S. economy.  Consequently, the deteriorating prospects for the United States – the panel cut the projections for U.S. growth this year to 1.6%, down from 1.7% expected last month -- translate into an ever weaker outlook for the Mexican economy. 

Inflation expectations stabilise as strong downward revision to Argentina offsets overall upward trend

According to this month’s poll, average regional inflation will reach 6.2% by the end of the year, which is unchanged over last month’s projection.  This month, a notable downward revision to one country (Argentina) offset upward revisions to four major economies (Brazil, Colombia, Peru and Venezuela).  The inflation forecast for Chile and Mexico remained unchanged over last month.  For the third consecutive month, Venezuela experienced the strongest upward revision to its inflation forecast, as Consensus Forecast panellists lifted their estimate by 1.0 percentage points to the current 25.4%.  While Venezuela is notorious for its persistent inflation, the current level is clearly beyond the normal and doubles the 12.6% inflation attained in 2005.  In fact, the projected inflation rate would mark the highest rate in a decade and could pose a serious threat to economic stability if monetary authorities fail to contain inflation.  Consensus Forecast panellists lifted the inflation outlook for Colombia by 0.2 percentage points from 4.4% expected last month to the current 4.6%.  Monetary authorities remain poised to reduce inflation and have continued to tighten the reins, lifting interest rates to a new six-year high in February.  While inflationary expectations continue to deteriorate for the time being, inflation is on a downward trend and is expected to end this year well below last year’s 5.7% rate. On a positive note, Argentina experienced a downward revision of 1.1 percentage points to this year’s inflation forecast.  According to this month’s Consensus, Argentina will post an inflation rate of 10.9% by the end of the year.  Nevertheless, inflation is high and the currently projected year-end rate well exceeds last year’s 8.5% level.  Moreover, changes in the methodology to measure consumer price variations implemented in early 2007 continue to raise doubts about the validity of the data, and other indicators suggest that actual inflation is considerably higher.  Amid this methodological uncertainty, Consensus Forecast panellists expect inflation to rise even further, reaching 11.8% by the end of 2009.