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US third quarter GDP revised
downward as recession unfolds
Officially declared in recession since March 2001, the US economy
continues to send mixed signals. Third quarter GDP was again revised
downward. According to the latest estimates of the Commerce Department,
the U.S. economy shrank at a 1.3% annual rate in the third quarter,
slightly worse than the 1.1% decline reported earlier. The revisions were
mostly attributed to lower consumption and exports data.
Recovery may be around the corner
However, other signs indicate that the worst may already have passed. The
University of Michigan consumer confidence index posted a sizable gain in
December, marking the third consecutive monthly improvement since the
September low. While most consumers believe the economy to be in
recession, they increasingly expect the overall economy to post some gains
this year. Moreover, according to preliminary evidence, retail sales came
in relatively strong in December. The Philadelphia-based Commerce Capital
Markets Comparable Store Sales Index, which tracks 48 stores nationally,
increased about 2.7%, well above market forecast of about 1.2%. Finally,
the Conference Board's U.S. index of leading economic indicators increased
by 0.5% in November as six of the ten indicators that make up the leading
index increased. Growth was mainly driven by gains in the financial,
housing and expectations components with initial claims for unemployment
insurance, interest rate spread and stock prices providing for the lion
share of the boost. The November movement marks the second consecutive
monthly increase. While not yet sufficient evidence for an end of the
recession, the Conference Board states that, if this pattern in the
leading index continues, an economic recovery may be possible even as
early as in the first half of this year.
US Federal Reserve chairman
Greenspan warns of “significant risks in the near term”
The chairman of the US Federal Reserve, Alan Greenspan, was more cautious
about an incipient economic recovery. In a speech on 11 January,
Greenspan acknowledged that the economy had fared better in the wake of
the 11 September terrorist attacks than expected by many and also
suggested that the long-run picture remains bright. He even pointed out
that recent signals about the current course of the economy have turned
from unremittingly negative through the late fall of last year to a more
favourable set of signals recently. However, the Fed chairman also
cautioned that despite a number of encouraging signs of stabilisation, it
is still premature to conclude that the forces restraining economic
activity in the United States and internationally have abated enough to
allow a steady recovery to take hold. Moreover, even when capital
spending eventually recovers, its growth is likely to be less frenetic
than that which characterised 1999 and early 2000. Nevertheless, he also
stated that companies had aggressively adjusted inventories and fixed
investment should begin to recover noticeably. Greenspan believes that,
if the tentative indications that the contraction phase of this business
cycle is drawing to a close are ultimately confirmed, the US economy is
likely to have experienced a relatively mild downturn.
Euro becomes a physical reality
across Europe
In Europe, the introduction of the Euro notes and coins in the 12
participating countries on 1 January 2002 proceeded as planned and did not
cause any major disruptions in the Euro Area’s commercial activities. By
11 January, the European Central Bank (ECB) considers the actual cash
changeover as being almost complete, as nearly all cash transactions were
processed in Euro by that date. Evidence that some entities have taken
advantage of the situation and have hiked prices for certain items remain
anecdotal and the ECB assures that there is no significant upside pressure
on prices resulting from the change of currencies. In fact, the inflation
forecast for this year remained unchanged from last month at 1.7%. Any
attempts to increase prices are made more difficult by continued sluggish
demand in the principal European economies. The Euro Area’s economy is
likely to have grown by 1.5% in 2001 but is seen expanding by just 1.1%
this year, a notch below last month’s forecast.
Gloomy outlook for Japan despite
stepped up efforts to counter crisis
In Japan, the situation continues to deteriorate and panellists have pared
their forecasts yet again. The Consensus now foresees a contraction of
0.6%, down 0.5 percentage points from last month and even worse than the
0.5% drop experienced in 2001. Moreover, deflation is seen accelerating
and forecasts for the annual variation in consumer prices this year have
been lowered by 0.2 percentage points over last month to -0.9%.
The Japanese government is desperately seeking to revive the ailing
economy. The Prime Minister, Junichiro Koizumi, has entrusted the Council
on Economic and Fiscal Policy to devise a new reform agenda. The Council
suggested supply-side policy measures to stimulate the economy, which may
include tax cuts and further deregulation to drive up entrepreneurial
activity. Moreover, the government has announced its intention to close
17 public companies and to privatise 45 another public companies,
including the country’s postal service.
Note: The above text is an abridged version of the LatinFocus
Consensus Forecast briefing for Latin America. For more details
please click
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