Latin America in a Global Context - Economic Briefing August 2008

Inflation Outlook Continues to Deteriorate

The global outlook remains subdued, despite the fact that major economic areas have proven robust so far. Although preliminary growth figures for the U.S. in the second quarter confirm moderate but positive growth, the outlook for the United States remains clouded. The housing market has not yet bottomed out and while consumer confidence has experienced a surprising rebound in July, the overall confidence level remains low and still points towards slower spending throughout late 2008 and early 2009. The leading economies in the Euro Area are also reporting multi-year lows in consumer confidence, implying that the surprisingly solid performance in the first quarter will give way to a deceleration in the remainder of the year. In addition, increasing oil and food prices have boosted Euro-zone inflation to an all-time high and have prompted the European Central Bank to raise interest rates. In Japan, consumer and business confidence are also sliding, while inflation has accelerated to the fastest pace in a decade in July. Against this backdrop, although the Latin American region is likely to grow at the slowest pace in three years, economic growth will remain robust, as the area continues to benefit from strong domestic demand and high commodity prices. Increasing oil and food prices, however, are likely to push regional inflation to the highest level in six years despite the monetary tightening observed across the region.

Brazil anchors regional outlook

Consensus Forecast panellists have left their 2008 output growth forecast for Latin America unchanged at 4.4%.  Upward revisions to one of the seven major economies (Peru) as well as unchanged forecasts for two other countries (Brazil and Chile) were sufficient to compensate for downward revisions to four major economies (Argentina, Colombia, Mexico and Venezuela).  Peru experienced the only upward revision, as panellists raised their GDP growth forecast by 0.3 percentage points over last month to 8.1%.  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.  On the downside, Colombia experienced the largest cut to its economic growth forecast.  Consensus Forecast participants pared their projection for GDP growth by 0.5 percentage points to the current 4.8%.  The economic outlook for Colombia is moderating as high inflation and monetary tightening are hurting domestic demand.  Venezuela experienced a downward revision of 0.3 percentage points to its growth forecast.  The panel cut its 2008 GDP growth projection from 5.7% in July to the current 5.4%.  The outlook for Venezuela’s economic growth continues to deteriorate, as several economic imbalances persist.  While soaring inflation threatens to stifle private consumption, a combination of price and currency controls as well as permanently looming nationalisations are discouraging private investment.  Argentina also experienced a downward revision to its growth forecast.  Consensus Forecast participants cut their forecast from the 6.3% expected in July to 6.1%.  The outlook for the Argentine economy deteriorated further, as both consumption and investment are set to moderate significantly this year amid soaring inflation and structural energy-shortages.  Finally, Mexico experienced a downward revision of 0.1 percentage points to its growth outlook.  The panel cut its 2008 GDP growth projection from 2.6% in July to the current 2.5%.  The Mexican outlook remains sombre, as several indicators for the domestic economy, which has been the main support of the current economic cycle, are showing increasing signs of weakness.

Inflation expectations post new six-year high

According to this month’s poll, average regional inflation will reach 8.3% by the end of the year, which is up 0.5 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 was revised downwards, marking the only exception.  Venezuela experienced the strongest upward revision to its inflation forecast, as panellists lifted their estimates by 1.5 percentage points from the 28.7% expected last month to the current 30.2%.  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.  The attempts of the Chávez administration to control price levels appear to backfire, as consumer prices shoot up amid lingering supply constraints.  Chile experienced the second-strongest upward revision to its inflation forecast, as panellists lifted their estimates by 0.9 percentage points from the 5.9% expected last month to the current 6.8%.  Although in July Chilean inflation stopped the upward trend in place since last year, it remains close to double-digits, which recently prompted the Central Bank to hike interest rates to a nine-year high.  Colombia experienced an upward revision of 0.7 percentage points to its inflation forecast, as panellists raised their projection from the 5.9% expected last month to the current 6.6%.  Colombia’s Finance Minister Iván Zuluaga recently stated that, this year, inflation is set to exceed the Central Bank’s target range for the third consecutive year, but that the government expects price pressures to start showing signs of moderation as of next month.  Brazil, the biggest Latin American economy, experienced an upward revision of 0.5 percentage points to its inflation forecast, as panellists lifted their estimates from the 6.0% expected last month to the current 6.5%.  Although the Brazilian Central Bank has repeatedly tightened monetary policy, inflation is likely to accelerate in the coming months and end the year at the highest level in three years.  Consequently, monetary authorities are expected to continue their restrictive policy and further raise interest rates.  Finally, Peru experienced an upward revision of 0.5 percentage points to its inflation forecast, while participants raised their inflation forecasts for Mexico by 0.4 percentage points.