U.S. slump spilling over.  The slump in the U.S. economy – in the fourth quarter last year GDP growth dropped to the lowest level in five years – has prompted yet another downward revision to regional growth prospects.  On average, Latin American GDP growth is now seen down another 0.1 percentage points over last month’s forecast.  Since the October edition of the LatinFocus Consensus Forecast, panellists have applied six consecutive downward revisions to their forecasts. 

Open economies most affected.  Mexico was once again the most seriously affected country owing to its dependency on the U.S. economy.  A sudden spike in February unemployment and disappointing industrial production data for January do not augur well for a continuation of the record economic expansion experienced last year.  Instead, panellists have applied the third consecutive cut to their GDP forecast for this year.  Chile, due to its openness, is also likely to suffer from a twist in the global economy.  The Chile GDP growth forecast has also experienced a 0.2 percentage point downward revision.  The downward adjustment indicates that markets believe that the recent interest rate cuts by the Central Bank and a broad-scale government debt relief package for small and medium sized companies are not sufficient to inspire confidence and to break the gloom-and-doom mood prevailing among consumers and the business community alike. 

Downward revisions limited to Chile and Mexico.  Other countries in the region have not suffered any downward revisions since last month.  In Argentina, the recent cabinet reshuffle seems to have inspired some confidence.  At least, the series of eight consecutive downward revisions to the 2001 growth forecast since June 2000 has come to a halt. This year, the economy will grow after two years of recession, albeit at a meagre pace.  Only Peru is seen to grow at a lower rate amid political uncertainties related to the upcoming 8 April presidential and congressional elections, which are keeping investment at bay.  In fact, Peru is likely to experience a recession this year, as growth was negative in the fourth quarter 2000 and the first quarter this year.  However, growth is seen picking up towards the end of the year.  In 2002, Peruvian growth is seen to double.  The region on average, will also see a substantial recovery in the coming year according to this month’s forecast.  

Downward trend in inflation firmly established.  On the positive side, the impact of lower global growth on the region seems to have bolstered monetary authorities efforts to lower inflation.  The GDP-weighted average inflation forecast for this year dropped 0.1 percentage points over last month.  Venezuela has experienced the steepest decline in inflation forecasts.  More important with regards to the regional average is the drop in Mexican inflation outlook, which was lowered 0.2 percentage points over last month. The deflationary bout observed in February is likely to further lower the outlook.  The downward trend in inflation from 8.3% in 1999 to 6.4% in 2000 is likely to persist in 2001 and 2002, despite the expected recovery in regional domestic demand.

Note:  The above text is an abridged version of the LatinFocus Consensus Forecast briefing for Latin America.  For more details please click here.

For five-year forecasts, please click here.