US and Global Outlook Worsening. Continued woes in Argentina and accumulating evidence that a recovery in global economic growth will not materialize as rapidly as anticipated are undermining the growth outlook for Latin America.  The United States Federal Reserve’s “Beige Book”, an anecdotal survey of national economic conditions published on 8 August, does not bode well for a a quick turnaround in the U.S. economy in the second half this year.  The book states that sluggish economic activity during June and July and the manufacturing sector's slide have begun to spill over into other areas of the economy.  Even though the economy continues to expand, growth is proceeding at a very slow rate and anecdotal evidence suggests that the credit quality in various sectors is deteriorating.  On a positive note, however, the economic slowdown seems close to bottoming, as the rate of deterioration in economic indicators is finally moderating.  According to initial U.S. Commerce Department estimates, U.S. gross domestic product (GDP) expanded by 0.7% in the second quarter.  Private sector forecasts indicate that economic growth will pick up to around 1.5% in the third quarter and 2.5% in the fourth quarter.

In addition to highlighting the deterioration in domestic developments, the Beige Book also observes a softening of global demand.  In fact, recent data from Europe and Japan suggest that the 3.2% global growth estimated by the International Monetary Fund in May is overly optimistic and that global growth will show a marked recovery only once the impetus provided by the Federal Reserve’s monetary easing pulls the U.S. economy free from its current slump.

Latin American prospects deteriorate further.  Not surprisingly, the more subdued outlook for the global economy has prompted the economists polled in the LatinFocus Consensus Forecast to apply further downward revisions to their growth estimates for this year.  The Consensus Forecast for Latin American economic growth has been lowered by another 0.2 percentage points since last month.  As a result, the regional growth forecast has been slashed by 1.2 percentage points within the past three months,

Mexico experienced the harshest cutback as recent data suggest that the scaling back of industrial production destined for the U.S. markets is quickly spilling over to the domestic side of the economy.  This has prompted panellists to apply a 0.3 percentage point cut in the estimated GDP growth rate for this year.  However, Mexico’s close ties with the United States will also serve to revive the economy more strongly in the coming year. 

In addition, panellists lowered their growth outlook for Argentina yet again as the government fails to break free from the vicious circle of declining investor confidence and rising default probability.  As a result, domestic interest rates have risen to levels, which would choke off even the most robust economy.  In Argentina, which is in the throes of its third year of recession, the current interest rate level serves to choke off any remaining strength and panellists have lowered their forecasts to barely positive growth.  A further deterioration into negative territory in the months ahead cannot be discarded. 

Forecasts for economic growth in Brazil, Chile and Colombia were also lowered significantly.  Concerns about spill-over effects from Argentina and reduced global demand have sliced 0.2 percentage points from last month’s forecasts in all three countries.  Chile, however, remains at the helm of the region with regard to economic prospects this year and will maintain the pole position in 2002.  The Brazilian economy, which also is feeling the impact of energy rationing, is seen to expand much more moderately this year than expected in January.  Peru is the only country, where panellists maintained their outlook, albeit at a low level, as Toledo secured abundant funds of international financial aid for his job creation programme intended to kick-start the economy. 

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.