Latin America in a Global Context - Economic Briefing June 2002

United States and Asia Spur Global Growth

The global economy is poised for a moderate recovery this year, providing the backdrop for a more robust rebound in 2003. Non-Japan Asia remains the fastest growing region and constitutes the main engine for global growth together with the United States, which will spur demand in the rest of the world via its sizeable current account deficit. Japan will remain in recession this year although prospects are improving and next year the country should see moderate growth. Growth in Europe remains lacklustre, as an impetus remains absent apart from increasing demand from the United States. In Latin America, double-digit recession in Argentina weighs heavy on regional prospects.

Global outlook inches upward amid increased optimism about Japan and the United States

After a rapid improvement in the sentiment for global economic growth in the first four months of the year, the outlook has inched upward a tiny notch, just sufficient to tip the average growth forecast from 2.0% last month to the current 2.1%. Japan experienced a noticeable upward revision of 0.3 percentage points amid positive GDP data for the first quarter this year. The outlook for the United States was also lifted a notch since last month, as the actual resilience shown by the economy nags at those forecasters that were cautious about the strength of the upswing. The outlook for the Euro Area remains unchanged, as additional impulses to revive the economy remain absent. Finally, the outlook for Latin America also remained unchanged as an upgrade of Mexico in the wake of increased optimism for the U.S. is compensated for by an even more pessimistic outlook for Argentina, where recession is seen at double digit levels this year.

Outlook remains buoyant as productivity increases should revive business spending

The upswing observed in the United States in the last two quarters persists, despite occasional downward surprises in the data releases, which have prompted some observers to voice doubts about the strength of the economic recovery. However, most indicators suggest robust growth in the months ahead. In particular, capital spending should pick up again and thus broaden the basis for more sustained economic growth. Productivity shot ahead at an annual rate of 8.4% in the first quarter, the fastest pace in almost 19 years. In the fourth quarter, productivity had grown 5.5% compared with just 1.1% in the third quarter. The strong rise in productivity should boost corporate earnings and ultimately prompt a pick-up in capital spending. This should help to further improve the labour market, which is already developing very favourably. On 7 June, the Labor Department reported that the unemployment rate unexpectedly fell in May for the first time in three months, to 5.8% compared to 6.1% expected by the market. However, since unemployment is a lagging indicator, it is more likely that the positive May reading was an exception and that unemployment will rise again somewhat in the coming months before heading towards lower levels in the second half of the year.

Nevertheless, the outlook for continued consumption resilience remains intact. The University of Michigan's final May consumer sentiment index rose to 96.9 from 93.0 in April, slightly above the preliminary May reading of 96.0 and also exceeding expectations. The index has now reached the highest level observed since December 2000. The Conference Board's gauge of consumer confidence also rebounded slightly in May, after a short dip in April. However, while the present situation index climbed in May, the expectations index fell slightly compared to April. According to the Conference Board, the latest retreat in expectations suggests that the pace of economic growth will not accelerate in the months ahead. However, consumers’ optimism regarding the current business and employment situation underscores the economy’s ongoing recovery and suggests a gradual improvement in the labour market conditions.

With capital spending to resume and consumption expected to continue to grow at the current pace, the prospects for robust economic growth for the remainder of the year are indeed good. Therefore, the decline in the Conference Board’s index of leading economic indicators, which fell 0.4 percentage points in April to 111.7, came as a surprise to most observers. However, the decline is the first since September and during the six-month span through April, the leading index increased 2.2 percentage points, with nine of the ten components advancing. Consequently, the upward trend of the leading indicator remains intact, suggesting that, while economic growth in the coming months will slow from the first quarter pace – revised downward to 5.6% -- the economy will nevertheless experience a solid rebound. The Consensus for this year’s GDP growth forecast was hiked yet another 0.1 percentage point to 2.8%.

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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