Bad news from the world’s largest economies ...  The latest news suggest that the global economy is anything but near to a recovery.  In fact, recent data releases point towards a significant and largely unexpected deterioration in global economic conditions.  While second quarter Japanese gross domestic product (GDP) figures did not surprise on the downside, the 3.2% annualized contraction confirms the dire state of the Japanese economy and that there is little hope that the country will escape a recession this year.  With lackluster economic growth in Europe, the eyes remain fixed on the United States.  But the global growth engine is sputtering.  According to a government report released on 29 August, second-quarter GDP grew at a slim annual rate of 0.2% (revised downward from the previous 0.7% growth), marking the weakest quarter since 1993.  Nevertheless, the actual reading surprised on the upside as most analysts had expected even weaker second quarter GDP performance.  Consumption figures were revised upward to a robust 2.5%, whereas investment suffered a further downward revision to a 14.6% contraction compared to the same quarter last year.  Inventories dropped by US$ 38.4 billion over the previous quarter and most industries seem to have lowered inventories to the desired level.  The main downside surprise, however, came from the labour market.  In August, the employment situation deteriorated more than expected to 4.9% from 4.5% in July.  This represents the sharpest increase in unemployment in the past six years.  Moreover, the current rate is the highest in more than four years and a full percentage point above last October’s low.  To date consumption has been the backbone behind continued growth and the sudden rise in unemployment fuelled concerns that a downturn in consumption could precipitate the fall of the U.S. economy into the first recession in a decade, which would thus forestall the much hoped for global recovery.

… trigger record cutbacks to regional growth outlook.  The ever more subdued outlook for the global economy has triggered yet another downward revision to the growth estimate for Latin America this year.  The forecast for average regional growth has been slashed by 0.8 percentage points from last month.  This month’s adjustment represents the largest downward revision applied since we began publishing the forecast results on a monthly basis, as the softer global economy and domestic issues augur for slower growth in all of the surveyed economies. 

Mexico suffers most from sluggish U.S. economy.  Mexico accounts for the lion share of this month’s downward revision.  The country’s forecast was revised downward a full percentage point.  Mexico continues to suffer from the adjustment to lower U.S. demand for Mexican manufactured goods and increasingly from a slowdown in domestic demand.  While monetary easing should provide some stimulus to the economy there is no doubt that the economy will only recover when growth of its northern neighbour fully resumes. Argentina experienced the largest cutback from flat economic growth expected last month to a  recession, as the economic policy conducted by economy minister Domingo Cavallo fails to inspire sufficient confidence among investors and consumers alike.  In addition, the recently announced zero deficit fiscal policy implies even tighter public spending, further stifling the modicum of strength remaining in the Argentine economy.  Brazil also suffered a major cut to its economic growth outlook, down 0.7 percentage points over last month’s forecast as the energy crisis stifles growth prospects of the industrial sector and the weakening currency begins to undermine consumer confidence.  Moreover, the continued upward revisions in inflation targets threaten to erode Central Bank credibility with negative consequences for a more benign interest rate environment.

The smaller economies in the region experienced lesser downward revisions to their growth outlook.  Consensus Forecast panelists applied 0.2 percentage point cutback to the expected economic growth in Chile, Colombia and Venezuela and the projections for Peru were lowered just a notch.

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.