Latin America in a Global Context - Economic Briefing June 2002

United States and Asia Spur Global Growth (cont.)

Japan is finally pulling clear from recession

In the first quarter, GDP expanded by a healthy 5.7% on an annualised basis, even above optimistic market forecasts of 5.5%. Compared to the previous quarter, the economy added 1.4%. The reading represented a strong rebound from three straight quarters of contraction and marked the strongest growth in two years. The good news followed the government's announcement last month that the economy hit bottom, as exports and industrial output received a boost by rising external demand. In fact, exports were the key behind the first quarter recovery, rising 6.4% from the previous quarter, while domestic consumer spending added 1.6%. Capital expenditures, on the other hand, dropped 3.2%, as corporate profits fell further amid persistent deflation. Businesses are likely to continue trimming inventories. Consequently the recovery, which is pulling Japan out of its longest recession in almost a decade, is fragile and the outlook remains subdued, as employment and wages continue to fall. Prime minister Junichiro Koizumi plans to implement tax reforms to help stimulate private spending, which include lower corporate taxes, preferential taxation on research and development spending and lower taxes for companies' spending on sectors with high growth potential. However, given the current size of the fiscal deficit, the manoeuvring room is limited and Koizumi’s tax reform, without hurting the overall tax balance, will only help in the medium to long term. Nevertheless, panellists have hiked their forecasts substantially to reflect the upside surprise and now expect the economy to contract by 0.6%, 0.3 percentage points above last month’s forecast.

Europe recovering slowly

In the Euro Area, GDP growth slowed to 0.1% in the first quarter compared to the same period last year, down from 0.3% in the final quarter last year. The main driver behind the slowdown was a weakening of domestic demand. Compared to the previous quarter, however, GDP increased by 0.2% which is above the values of the previous three quarters thanks to a pick up in exports. The prospects for a Euro Area recovery are improving. The economic sentiment indicator elaborated by the European Commission resumed its upward trend, adding 0.4 percentage points, from 99.4 in April to 99.8 in May. And the European Commission’s indicator-based forecast model predicts GDP growth in the range of 0.3% to 0.6% (quarter-on-quarter) in the second quarter, increasing to a range of 0.7% to 1.0% in the third quarter. While the third quarter forecast was actually lowered 0.2 percentage points compared to an earlier forecast, the projections nevertheless confirm that a recovery in the Euro Area is underway and will gain momentum in the months ahead.

Sentiment for the Latin American outlook remains unchanged

Despite the increased optimism about a global rebound that has been building up in the past months, the sentiment for the Latin American outlook remains unchanged on average as upgrades and downgrades level out on balance. While other countries also have experienced minor adjustments, the direction to which the balance is tipping is mainly dependent on two of the regions largest economies: Argentina and Mexico. On the positive side, Mexico profits from the robust rebound of the United States. Although the impulse of higher U.S. growth is slow to translate into an upswing of the Mexican economy there can be no doubt that a sustained recovery in the United States will finally take hold of the Mexican economy. However, on the other side of the balance for Latin American growth is Argentina. This month, the growth outlook for Argentina darkened further, as the government fails to pull the necessary strings to secure the vital IMF support. Consequently, the Consensus for GDP growth this year has dropped another 1.2 percentage points since last month to a 11.0% recession. Simultaneously, the inflation forecast has gone through the roof, raising memories of recession and hyper-inflation.

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.

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