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Global prospects unchanged as weaker
Japan offsets stronger US
The outlook for global economic growth this year remains unchanged at 1.3%
compared to last month’s forecast as the gloomier picture of the Japanese
economy compensated for a more optimistic scenario in the United States.
In the United States, a run of solid economic data continued to back hopes
that the economy bottomed out in the third quarter and is already
rebounding. Increased optimism about a quick turnaround has lifted the
outlook for this year by 0.2 percentage points to 1.2% growth. Since the
outlook for the Euro Area was left unchanged at 1.1% growth, the US
economy will lead Europe once again, following only one year of faster
growth in Europe. The outlook for Latin American economic growth was
lowered by 0.3 percentage points compared to last month. The downward
revision is almost entirely due to Argentina, where forecast has been
lowered another 2.5 percentage points and the Consensus now expects a
recession of 7.8%.
US economy turns positive in fourth
quarter but some uncertainty persists
The recession in the United States is not quite over but an increasing
slate of positive data releases suggests that it is in its final stages.
In the fourth quarter, gross domestic product (GDP) increased at an annual
rate of 0.2%, according to advance estimates released by the Bureau of
Economic Analysis. The positive but still weak growth for the fourth
quarter follows on an annual decline of 1.3% in the third quarter and was
far better than market forecasts, which anticipated a decline of 1.1%.
The fourth quarter expansion reflected increased personal consumption
expenditures and government spending, which was partially offset by
negative contributions from fixed investment and weaker exports. Real
personal consumption expenditures increased 5.4% in the fourth quarter,
much stronger than the 1.0% increase registered in the third quarter.
However, the consumption numbers are inflated by incentive-led spending.
Durable goods purchases mushroomed 38.4% (compared with an increase of
0.9% in the third quarter) as bargain-hunting consumers took advantage of
generous incentives in the automobile industry. In fact, motor vehicles
purchases accounted for more than two thirds of the fourth-quarter
increase in consumer spending. Nondurable goods, on the other hand,
increased 0.9% in the fourth quarter, only slightly better than the 0.6%
increase in the third quarter. Services expenditures increased 1.6%,
following 1.2% growth in the third.
Investment continues to decelerate
and exports drop at double-digit rates
Fixed investment dropped 12.8% in the fourth quarter, even worse than the
8.5% contraction registered in the third quarter. And while the
performance of exports improved compared to the 18.8% decline in the third
quarter, they still contracted by a heavy 12.4%. Strong consumption
managed to bolster imports, which decreased only 3.4%, compared with a
decrease of 13.0% in the third quarter. Finally, the fourth quarter
rebound was also supported by a hefty increase in government spending. In
real terms, federal government spending increased 9.5% in the fourth
quarter, compared with a 3.6% increase in the third, boosted by
extraordinary spending related to the 11 September terrorist attacks. In
2001, the economy grew 1.1%, substantially lower than the 4.1% expansion
in 2000 and the weakest growth rate since 1991.
Positive surprises prompt upward
revision to this year’s growth outlook
Despite the surprisingly positive fourth quarter reading, uncertainty
persists over the timing and the scope of the recovery. Some economists
maintain that the fourth quarter result was just a brief respite from the
recession, which will return once the special circumstances, which induced
the fourth quarter growth, abate. The advocates of the so-called
double-dip recession argue that the incentive induced spending in vehicles
is unsustainable and that the increases in government spending will have
to come down. However, recent data suggest that other categories may
substitute for any growth decline in durable goods and government
spending. The current rate of inventory liquidation is unsustainable and
businesses will have to replenish soon. In the fourth quarter, the real
change in private inventories subtracted 2.23 percentage points from the
fourth-quarter change in real GDP, almost triple the amount than in the
third quarter. Once US businesses build up their inventories again, this
will provide a substantial boost to economic growth. Furthermore, while
consumption is unlikely to rebound as strongly as in previous economic
cycles (owing to the strong housing market and vehicle sales in 2001)
recent data indicate some resilience in consumption. The University of
Michigan consumer confidence index posted another sizable gain in January,
marking the fourth consecutive monthly improvement since the September
low. Most consumers still assess the current economic conditions
negatively but they are increasingly optimistic about the future
development of the US economy as evidenced by the consumer expectations
index, which surged in January. The more favourable set of signals given
by the economic data has prompted analysts to revise upward the outlook
for US economic growth to 1.2%, which is 0.2 percentage points above last
month’s estimate. The uncertainty about the scope of the recovery,
however, remains high with forecasts ranging from 0.5% at the lower end to
2.2% at the upper end.
Note: The above text is an abridged version of the LatinFocus
Consensus Forecast briefing for Latin America. For more details
please click
here.
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