Latin America in a Global Context - Economic Briefing April 2008

Outlook Stable Despite Deteriorating Prospects for the U.S.

The global outlook is showing increasing signs of weakening, as major economic areas falter. In fact, Consensus Forecast participants expect the global economy to grow at the slowest pace in five years. In the United States, most observers are now expecting a serious dent in economic growth this year and the majority are expecting an outright recession in the first half of the year. In fact, the U.S. economy may already be contracting, as the effects of falling housing prices, the sub-prime crisis and the ensuing credit crunch appear to have spread to the entire economy. Employment is declining at a rapid pace, eating into consumer confidence, which augurs for a deterioration of consumer spending. While the fiscal stimulus package will rekindle growth in the second half of the year, the impact will be short-lived and the outlook for the U.S. remains subdued well into 2009. Europe is also likely to experience a slowdown, even though recent indicators for Germany suggest that the region’s largest economy is holding up well for the time being. However, an interest rate cut in the Euro Area is increasingly unlikely, as inflation recently reached the highest level since 1992. Meanwhile, the outlook for the Japanese economy continues to deteriorate as business confidence fell to the lowest level in four years and consumer sentiment dropped to a five-year low. 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.

Outlook stable as domestic demand develops its own dynamics

With the latest data reports for 2007 coming in, the estimate for last year’s economic growth has been revised upwards from the 5.4% projected last month to 5.5%.  At this level, the region expanded at the fastest pace in more than 15 years notwithstanding 2004, when a strong bounce-back in Venezuela spurred the regional average.  In particular, the growth figures for Brazil and Colombia drove up the regional average for 2007, as GDP estimates for these countries were revised 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 in the region.  Consensus Forecast panellists have left their 2008 output growth forecast for Latin America unchanged at 4.5% for the fifth consecutive month.  Upward revisions to four of the seven major economies (Argentina, Brazil, Peru and Venezuela) were sufficient to compensate for downward revisions to three economies (Chile, Colombia and Mexico).  Argentina and Venezuela experienced the strongest upward revisions, as panellists raised their GDP growth forecast by 0.2 percentage points for both countries.  In the case of Argentina, panellists lifted their 2008 GDP growth projection from 6.3% expected last month to the current 6.5%, in spite of looming energy shortages ahead of the approaching winter season and recent farmer strikes, which disrupted agricultural exports during three weeks.  For Venezuela, the panel lifted its 2008 GDP growth projection from 6.0% in March to the current 6.2%.  The long-term outlook for Venezuela, however, is more sombre, as the Chávez administration fails to make the necessary investments in the oil sector in order to increase or even maintain the current oil output levels, thus undermining the country’s wealth foundation.  In fact, some analysts are already predicting a severe slowdown for 2010.  On the downside, panellists pared the growth forecast for Chile by 0.3 percentage points to the current 4.3%.  This month’s projection contrasts the 5.2% growth expected by Consensus Forecast panellists six months ago, which was almost a full percentage point above the current prediction.  Growth prospects for this year are deteriorating, as export growth is likely to slow notably amid moderating global demand and a strong peso.  In addition, high interest rates will continue to curb domestic demand growth.  Along with Chile, panellists cut the growth forecast for Mexico by 0.1 percentage points to a paltry 2.6%.  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 1.2%, down from 1.6% expected last month – translate into an ever weaker outlook for the Mexican economy.

Inflation expectations resume upward trend

According to this month’s poll, average regional inflation will reach 6.4% by the end of the year, which is up 0.2 percentage points from last month’s projection.  This month, Consensus Forecast panellists raised their inflation forecasts for six of the seven major economies in the region.  Only Mexico was left unchanged over last month.  For the fourth consecutive month, Venezuela experienced the strongest upward revision to its inflation forecast, as Consensus Forecast panellists lifted their estimate by 1.6 percentage points to the current 27.0%.  While Venezuela is notorious for its persistent inflation, the current level is clearly beyond the norm and doubles the 12.6% inflation registered 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 it.  Following Venezuela, Consensus Forecast panellists lifted the inflation outlook for Peru by 0.6 percentage points from 3.0% expected last month to the current 3.6%.  In the last three months, consumer prices rose above more than expected in Peru and inflation just reached the highest level in more than nine years.  Consequently, the panel has revised upwards its inflation forecast and now expects year-end inflation to exceed the Central Bank’s target range.  Colombia also experienced an important upward revision, as Consensus Forecast participants lifted their inflation outlook by 0.3 percentage points from 4.6% expected last month to the current 4.9%.  Monetary authorities remain poised to reduce inflation and have maintained interest rates at a six-year high in March.  While inflationary expectations continue to deteriorate, inflation has embarked on a downward trend and is expected to end this year well below last year’s 5.7% rate.  Meanwhile, the Consensus Forecast panel resumed the string of upward revisions to the inflation outlook for Chile.  This month, panellists raised their inflation forecasts for Chile by 0.2 percentage points from 4.2% expected last month to the current 4.4%, which is above the Central Bank’s 3.0% target but constitutes a notable deceleration in inflation after last year’s record 7.8%.  Finally, Argentina and Brazil experienced upward revisions of 0.1 percentage points.