Economic Briefing November  2001

Outlook for global economy worsens as full impact of September 11 sinks in

The outlook for global economic growth has been pared again as economists continue to adjust their forecasts in the wake of the 11 September terrorist attacks.  Compared to last month, the global output growth forecast for 2001 was lowered 0.2 percentage points to 1.7% and the 2002 forecast dropped 0.3 percentage points to the current 2.0%. 

US economy begins to contract and unemployment skyrockets

In the United States, the economic decline, which was already under way before the September events, has become official with the release of preliminary third quarter results.  The annualized 0.4% contraction was well above market expectations of a 1% decline but still marks the first negative quarter since 1993.  Moreover, unemployment reported for October surged to a much higher than expected 5.4%, which represents the highest rate in five years and the pace at which payrolls are declining is the highest since 1980.  Finally, October wholesale prices dropped by 1.6% over the previous month, the fastest pace on record.

US authorities act aggressively to counter economic slump

Given the alarming signs of a severe downturn in the US economy, authorities have stepped up their efforts aggressively to counter the economic slump exacerbated by the downside effects of the terrorist attacks on the domestic economy.  The US Congress is currently debating an economic stimulus plan, which if approved would provide an additional US$ 100 billion impetus to the economy in fiscal year 2002.  The amount would add to the US$ 72 billion in fiscal year 2002 resulting from the Economic Growth and Tax Relief Reconciliation Act signed into law in June.  In addition, the Federal Reserve Bank is opening the monetary floodgates.  On 6 November, the Federal Open Market Committee (FOMC) decided to reduce the target for the federal funds rate by 50 basis points to 2.0%.  The move took the markets by surprise since expectations tended more towards a 25 basis point cut.  The current level of interest rates is the lowest in almost 40 years and hovers at the brink of negative real interest rates, given the current inflationary expectations of 2.0%.  According to the Fed, the cut was implemented to counter “heightened uncertainty and concerns about a deterioration in business conditions”. 

Stimulating measures seen taking effect in the second half of 2002

Given the bold movements by US authorities, most economists expect the economy to recover in the second half of 2002.  Nevertheless, the Consensus Forecast for US economic growth in 2002 was lowered by another 0.3 percentage points to 1.1% compared to only a 0.1 percentage point notch downward revision for this year to 1.0%. 

Japanese government announces yet another recessionary year

In Japan, economic conditions took a turn for the worse as capital investment declined and unemployment. rose to a record 5.3% in September.  Consequently, on 9 November, the Japanese government announced that it expects the economy to contract this fiscal year, ending in March, by 0.9%, reversing its previous estimate of 1.7% growth.  This year’s contraction in real GDP would be the largest drop since 1980 and would represent the fourth recession in a decade.  The deterioration in the economic outlook may jeopardize Prime Minister Junichiro Koizumi's plans for structural reforms and much needed fiscal tightening.  In fact, the government endorsed a supplemental budget totaling 3.0 trillion Yen (US$ 25.0 billion) for the current business year to boost jobs and revive the ailing economy.  Nevertheless, the outlook for Japanese growth in 2001 and 2002 was lowered 0.3 percentage points to a contraction of 0.7% this year and a meager 0.1% expansion in the coming year.

Europe follows Fed in decision to loosen monetary reins

With economic conditions in Europe worsening, both the European Central Bank (ECB) and the Bank of England followed the Federal Reserve Bank’s decision and on 8 November cut rates a half percentage point, to 3.25% and 4.0% respectively.  The fourth interest rate cut this year brings the ECB’s total easing to 150 basis points, compared to ten cuts totalling 450 basis points in the United States.  So far, the ECB has proven more reluctant than its US counterpart to ease monetary policy since inflation remains above the Bank's two percent ceiling, but finally responded to weeks of pressure to stimulate the continent's sagging economy in the face of recession warnings.  According to ECB president, Wim Duisenberg, business and consumer “confidence has been harder hit than we thought only a few weeks ago” and all available information pointed to lower risks of inflation.  In fact, the Consensus sees average inflation in the Euro Area in 2002 well below the Bank’s upper limit at 1.6%.  Slower growth expectations have become a major factor behind the anticipated easing of price pressures.  Growth projections for next year were lowered by 0.4 percentage points since last month to 1.4%.

Latin American growth outlook lowered amid global slowdown and lingering Argentina crisis

The lower global outlook has also fed through to projections for Latin America.  Regional growth next year is now seen at 2.0%, 0.3 percentage points below last month’s forecast and this year’s GDP growth forecast was also lowered a notch to 0.6%.  Mexico experienced the largest downward revision, as Consensus Forecast participants lowered their forecasts for GDP growth in 2002 by 0.7 percentage points to 2.0%.  The drop reflected continued reductions to the US outlook and doubts over a rebound of oil prices.  However, since the US economy is seen recovering in the second half of 2002, Mexico also is expected to rebound, providing a backdrop for robust growth in 2003.  The pressure on oil prices exerted by the softening of global demand also prompted a strong downward adjustment to the outlook of the Venezuelan economy for next year by 0.4 percentage points to 2.3%.  Finally, three Southern Cone countries, Argentina, Brazil and Chile suffered severe cutbacks to their growth outlook.  Whereas downward revisions in Brazil and Chile can be attributed to the impact of the global economic downturn, Argentina suffers more from the ongoing domestic crisis.  The government’s decision to require sovereign debt holders to swap their existing obligations for lower yielding bonds was not received well by the markets and has triggered another downgrade of the country’s sovereign debt rating by Standard and Poor’s.  Moreover, concerns about a default continue to linger and the viability of the dollar peg is at question as investors increasingly withdraw their capital.

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.