Latin America in a Global Context - Economic Briefing July 2002

Growing Shadow over Brazil

While global economic growth will pick up over sluggish 2001, the recovery will be moderate. Only two economic areas, non-Japan Asia and the United States, will drive growth this year with the other world regions dragging along. Despite improving prospects, Japan will experience yet another year of negative growth, the third in the past five years. Europe is poised for moderate growth in the wake of increasing demand from the US. However, the recent strength of the Euro against the US$ threatens to choke off the recovery before it translates into higher domestic demand. In Latin America, the persistence of the Argentine crsis and a growing shadow over Brazil weighs heavily on this year’s prospects.

Global outlook unchanged despite increased optimism for Japan

The outlook for the global economy remains unchanged compared to last month, as increasing optimism for the Japanese economy is offset by a slightly darker picture for the United States and Europe. This brings the string of five consecutive upward revisions to the global growth outlook to a halt. The forecast for GDP growth in Japan was lifted 0.2 percentage points amid the stronger than expected performance in the first quarter and rising business confidence. However, output growth remains in negative territory and the country is set to experience the third recession within the past five years. The outlook for the United States was lowered a notch as the recent accounting scandals threaten to wear down consumer spending via the wealth effect. Europe also experienced a minor downward revision to its growth forecast as the stronger Euro may curtail a more pronounced export-led recovery. Finally, the outlook for Latin America experienced a substantial downward revision. The outlook for all major economies was lowered amid a persistent crisis in Argentina, waning confidence in Brazil’s fiscal stability and political jitters in Peru and Venezuela.


Sentiment for USA slightly more negative

According to revised estimates released by the Bureau of Economic Analysis, gross domestic product (GDP) increased at an annual rate of 6.1% in the first quarter of 2002, its fastest clip in more than two years and a major improvement from the 1.7% growth in the fourth quarter of last year. The “final” reading represents an upward revision over the preliminary estimates of 5.6% growth and the earlier advance release, which had reported 5.8% real GDP growth. The upward revision in real GDP reflected a downward revision to imports and an upward revision to output of equipment and software that were partly offset by a lower exports.

Despite the very strong first quarter reading, Consensus Forecast panellists lowered their forecast for full-year economic growth a notch over last month to 2.7%. The current accounting scandals at Enron, WorldCom and Xerox seem to be behind the slightly more negative sentiment for the US economy. The scandals triggered a confidence crisis and prompted a massive sell-off in assets. This has raised concerns that the wealth effect may finally wring down the American consumer who has so far kept the US economy going as investment plummeted. However, the wealth effect is unlikely to drive consumption into negative territory as lower interest rates and the resilient real estate market compensate for losses in stocks. Nevertheless, the strong growth pace observed of private consumption growth over the past two quarters seems unsustainable, as it was in part driven by one-time effects (for details see June edition of the Consensus Forecast.). Recent data suggest that consumption slowed in the second quarter. Moreover, consumer confidence, an important gauge of the future development of consumption, is weakening: in June the Michigan University index dropped to 92.4 from 96.9 in May. Finally, unemployment also edged up to 5.9% in June from 5.8% in May. Despite these more subdued data releases, the economy remains well poised for solid growth. Panellists expect economic growth in the second quarter to come in between 3.0% and 3.5%.




 

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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