Latin America in a Global Context - Economic Briefing July 2008

Outlook Optimistic Despite Global Slowdown

The global outlook remains subdued, despite the fact that major economic areas have proven robust so far. Final growth figures for the U.S. in the first quarter confirm moderate but still positive growth, and in the second quarter, the economy should have avoided a contraction, as the effects of the tax rebate checks have bolstered private consumption. However, the outlook for the United States remains clouded. The housing market has not yet bottomed out and persistently falling real estate prices promise to further gnaw at consumer confidence, which already hit the lowest level in 28 years in June. Moreover, the impact of additional spending power will be short-lived as tax rebates draw to an end. As a result, the outlook darkens towards the end of the year and well into 2009. In the Euro Area, the economy remained surprisingly robust in the first quarter. However, declining consumer confidence as well as diminished industrial activity in several economies suggest that the Euro Area is poised for a slowdown. In addition, increasing oil and food prices continue to fan inflation and prompted the European Central Bank to raise interest rates. In Japan, household confidence dropped to a six-and-a-half-year low in May while inflation accelerated to the fastest pace in a decade. Against this backdrop, although the Latin American region is likely to grow at the slowest pace in three years, economic growth remains robust, as the area continues to benefit from strong domestic demand and high commodity prices. Regional inflation, however, is likely to reach the highest level in six years, as increasing oil and food prices continue to exert pressure on consumer prices.

Regional outlook moderates a notch on weaker prospects for Argentina

Consensus Forecast panellists have revised downwards their 2008 output growth forecast for Latin America from last month’s 4.5% projection to the current 4.4% estimate.  Up until last month, the Consensus had remained at 4.5% for seven consecutive months.  Upward revisions to two of the seven major economies (Brazil and Peru) were not sufficient to compensate for downward revisions to four major countries (Argentina, Chile, Colombia and Venezuela).  The growth outlook for one country, Mexico, remained unchanged at last month’s 2.6% forecast.  Peru experienced the strongest upward revision, as panellists raised their GDP growth forecast by 0.2 percentage points over last month to 7.8%.  The Peruvian growth outlook continues to improve, as resilient domestic demand, in particular investment, is bolstering economic activity, thus mitigating the impact of slowing global demand.  At the currently projected growth rate, the country maintains its position as the fastest growing economy in the region for the second consecutive year.  Next to Peru, Brazil experienced an upward revision of 0.1 percentage points to its growth forecast.  The panel lifted its 2008 GDP growth projection from 4.7% in June to the current 4.8%.  After being granted investment grade status by two of the three major international rating agencies, the outlook for Brazil’s economic growth is beginning to improve, fuelled by increasingly optimistic prospects for investment.  On the downside, Argentina experienced the largest cut to its economic growth forecast.  Consensus Forecast participants pared their projection for GDP growth by 0.3 percentage points to the current 6.3%.  The outlook for the economy has started to deteriorate as the ongoing conflict between farmers and the government is weighing heavily on consumer and business confidence.  Meanwhile, Chile, Colombia and Venezuela experienced a downward revision of 0.1 percentage points to their GDP forecasts.  In the case of Chile, panellists cut the growth forecast for this economy from the 4.1% expected last month to the current 4.0%, which is the fifth consecutive downward revision.  The Chilean economy should remain lethargic, as export growth is likely to moderate notably despite the current high copper prices, and domestic demand will continue to suffer from high interest rates.

Inflation expectations soar across entire region

According to this month’s poll, average regional inflation will reach 7.7% by the end of the year, which is up 0.6 percentage points from last month’s projection and, if attained, would represent the highest rate observed in six years.  This month, Consensus Forecast panellists raised their inflation forecasts for six of the seven major economies in the region, with Argentina, where the inflation forecast remained unchanged, marking the only exception.  Inflation expectations are rising, as higher food and oil prices continue to exert strong pressure on consumer prices across all countries in the region.  Chile experienced the strongest upward revision to its inflation forecast, as panellists lifted their estimates by 1.1 percentage points from the 4.8% expected last month to the current 5.9%.  Despite the monetary tightening executed in the past months, Chile’s inflation continues to climb and almost reached double digits in June.  Furthermore, before the publication of the June inflation data, Central Bank President José de Gregorio stated that the inflation outlook had worsened, fuelling speculation that monetary authorities will raise interest rates further at their next policy meeting on 10 July.  Despite the persistent rise in inflation, the Chilean Central Bank maintains its long-standing 3.0% medium-term inflation target, with a ±1% tolerance margin.  Brazil, the biggest Latin American economy, experienced the second-strongest upward revision to its inflation forecast, as panellists lifted their estimates by 0.8 percentage points from the 5.2% expected last month to the current 6.0%.  Panellists revised their projections for Brazil upwards despite the fact that the Central Bank recently raised interest rates for the second time within two months.  Panellists also raised their inflation forecast for Venezuela by 0.8 percentage points, from the 27.9% expected last month to the current 28.7%.  While Venezuela is notorious for its persistent inflation, the current year-end forecast would mark the highest rate in six years and could pose a serious threat to economic stability if monetary authorities fail to rein in inflationary expectations.  Apparently, the attempts of the Chávez administration to control price levels backfire, as consumer prices shoot up amid lingering supply constraints.  Finally, Colombia experienced an upward revision of 0.5 percentage points to its inflation forecast, while participants raised their inflation forecasts for both Mexico and Peru by 0.4 percentage points.