Record cutbacks to regional growth outlook.  In light of a more pronounced global weakening – reflected in a drop of almost one percentage point in the anticipated growth rate in Latin American exports -- the Consensus Forecast for Latin American economic growth this year has experienced substantial cutbacks.  The forecast for average regional GDP growth has been slashed by 0.6 percentage points from last month.  This represents the largest downward revision applied since we began publishing the forecast results on a monthly basis and a full percentage point below the March projection, as the softening of the global economy and domestic issues presage slower growth in all of the surveyed countries.  Brazil experienced the largest cutback, a full percentage point.  The government’s announcement to introduce a major energy-rationing programme, including mandated scale backs in energy consumption across various industrial sectors will severely impact industrial growth this year. 

Homemade problems add to global softening.  The growth outlook for Argentina was pared by 0.8 percentage points.  Argentine consumer confidence continues to plummet despite the fact that the cost of borrowing in international markets has come down significantly in the wake of the recent successful bond swap.  Mexico’s forecast was lowered 0.5 percentage points.  In addition to lingering doubts about a quick recovery in the United States, weaker than expected first quarter results accounted for the more pessimistic sentiment over the Mexican economy.   In Chile, stubbornly high unemployment continues to thwart a rebound in consumption, which is needed to offset a weaker external sector.  As a result, the Chilean growth forecast was stripped of 0.3 percentage points.  Peru also experienced yet another downward revision despite the victory of Alejandro Toledo over Alan García in the 3 June elections.  April marked the fifth consecutive monthly GDP contraction, which does not bode well for the rest of the year, even as Toledo promises to jumpstart the economy with an emergency package of economic incentives.  The GDP growth forecasted for this year make the Peruvian economy the slowest growing economy in the region.  Colombia and Venezuela experienced only minor downward revisions in forecasted GDP growth, down “only” 0.3 and 0.2 percentage points over last month respectively.   In Colombia, the government reacted to a weak first quarter GDP reading with the earlier than expected implementation of a sizeable public investment project.  In Venezuela, confidence in the Chávez administration continues to wane as a result of continued delays in the adoption of key legislation affecting the economy and government threats to intervene in the determination of interest rates.

Accommodating monetary policy prompts slight upward revision to inflation forecast.  Despite the slowdown in economic growth, the GDP-weighted average inflation forecast for the region was revised upward a notch from where it had remained stable over the past three months.  However, the minimal movement is not sufficient to discern a trend towards more lax monetary policy in the region and does not reflect an overreaction of monetary authorities to lower domestic demand.  In fact, the increase in average inflation in the region is entirely attributable to Brazil, the only country, where the Central Bank actually tightened monetary policy.  In Mexico, where the Central Bank lowered interest rates, inflationary expectations have dropped substantially and are now in close range of the Central Bank’s year-end inflation target of 6.5%.  Thus, the overall trend to lower inflation in the region remains intact with the average rate expected to drop further in 2002.

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

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