Latin America in a Global Context - Economic Briefing December  2001

Latin American Growth Forecast Lowered Again Amid More Pessimistic Outlook

The movement in international financial markets stands in stark contrast to the global outlook.  Whereas stock markets around the world are recovering quickly in anticipation of a rebound of the global economy, economists continue to revise their projections downward to levels last seen in the 1991 recession.  In the United States, where the economy is now in recession, the Federal Reserve is expected to further lower interest rates but the fiscal stimulus package is stalled in Congress.  Japan will experience another year of recession and deflation, while the prospects for the Euro Area are deteriorating rapidly.  In Latin America, the Argentina crisis still looms, which is adding downside pressures to the economic growth trajectory of the major economies increasingly suffering from the impact of the global softening.

Forecasts for global economy slashed again

Even though financial markets are rising in anticipation of a quick recovery of the global economy, economists continue to anticipate more clouds on the horizon and have again lowered their forecasts.  Compared to last month, the global economic growth forecast for 2002 dropped by 0.2 percentage points to 1.8%, which would represent the lowest expansion since 1991 and a level which many characterise as a global recession. 

Strong US retail sales in October inflated by incentives for automobiles

In the United States, economic statistics are still coming in mixed, albeit with a strong penchant for the worse.  October retail sales were strong, indicating that consumption may even accelerate in the fourth quarter.  The Commerce Department reported that total retail sales expanded a seasonally adjusted 7.1% over the prior month, the strongest surge for any month on record, after shrinking by 2.2% in September.  However, the October figure is inflated by sales incentives, in particular cheap financing for new cars, which may eat into future sales once the retailers withdraw them.  When excluding auto sales, retail sales increased by just 1.0% from a month ago

Unemployment rises sharply as businesses adjust workforces to lower demand

The labour market, on the other hand, is showing clear signs of a weaker economy.  In November, firms cut another 331,000 workers from their payrolls.  While the figure was below the revised 468,000-jobs payroll plunge in October, it was far worse than the 189,000 that the market had anticipated.  According to the Labor Department, the October and November job losses were the worst for any two months since May and June of 1980.   As a result, the unemployment rate increased to 5.7%, reaching its highest level since August 1995.

US economy officially declared in recession

The labour market data confirm that the U.S. economy is headed for a recession.  In fact, the National Bureau of Business Economists (NABE) announced in November that the 11 September attacks pushed the U.S. economy into a recession.  The National Bureau of Economic Research (NBER), considered the official arbiter of recessions, later declared that the recession actually begun earlier in March. 

According to NABE panellists, the terrorist attacks have negatively impacted real gross domestic product (GDP) growth by 1.0% in the third quarter, 3.0% in the fourth quarter, and 1.6% in the first quarter of 2002.  NABE now expects a 2.0% decline in the fourth quarter of 2001, which represents a large downward revision from the September survey’s 2.3% GDP growth and follows on a revised 1.1% contraction in the third quarter reported by the Commerce Department.  However, NABE panellists are optimistic the recession will be mild both in depth and duration and expect the economy to return to positive growth more quickly than in a typical business cycle.   

The recovery is expected to begin in the first half of next year due to the rapid easing of monetary and fiscal policy.  Accordingly, the Federal Reserve is likely to maintain its aggressive stance on interest rates and to implement a further cut on 11 December, which would be the 11th downward adjustment in the Fed Funds rate this year to just 1.75% -- the lowest target for short-term interest rates since 1961.  Negotiations over an economic stimulus package have been put on hold due to a political stalemate among lawmakers.  The LatinFocus Consensus is much less optimistic about growth prospects for next year, as growth is anticipated to rise just 1.0%, down another 0.1 percentage point since last month.

Japan continues to be mired in recession and deflation

In Japan, the situation is even worse and panellists now foresee yet another recessionary year in 2002, as forecasts have been lowered by 0.2 percentage points over last month’s barely positive 0.1% growth estimate.  In the third quarter, Japanese GDP dropped by 0.5% over the same period last year, slightly better than expected.  However, the government lacks the resources to provide any additional fiscal stimulus to pull the economy free from the cycle of high unemployment (currently at a record high of 5.4%) and weak consumer spending.  In addition, Japan is likely to remain mired in deflation with prices dropping 0.8% this year and 0.7% in 2002, according to the Consensus.

Outlook for European economy deteriorates rapidly

Growth in the European economy has continued to decelerate.  Germany in particular is experiencing a marked slowdown as evidenced by sluggish growth in the third quarter and plummeting industrial production in October, following up on an already weak September reading.  Moreover, business sentiment is worsening at a worrying pace.  According to Economic Research Institute IFO (Institut für Wirtschaftsforschung), business sentiment dropped further in October indicating an additional deceleration. 

The trend of increased business pessimism is not confined to the region’s largest economy.  The European Commission announced that the monthly November business and consumer survey showed that sentiment slipped to its worst level since 1997.  As a result, the European Commission trimmed its official growth forecast and now expects the Euro Area’s GDP growth to fall from 1.6% this year to 1.3% in 2002 before recovering the following year.  Panellists share the increased pessimism and have lowered the Consensus growth forecast by 0.2 percentage points to 1.2%.

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.