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Prospects for Japanese economy
improve in the wake of a healthy external sector
The resilience of the US economy seems sufficient to prop up the Japanese
economy. As reported last month, the Japanese economy is showing signs of
stabilising due to the strong rise in exports. Recent production data
corroborate the more optimistic outlook generated by the first quarter
numbers. Industrial production increased 3.9% in May over April. The
reading was the fourth positive monthly result and also exceeded market
expectations. Nevertheless, domestic private demand remains weak according
to the latest monthly report of the Bank of Japan. And while business
confidence picked up strongly, according to the quarterly Tankan report,
the pessimists still outnumber optimists. Moreover, the confidence hinges
on a weak yen, which is seen driving the country’s exports. Therefore, the
recent strength of the yen – despite significant Central Bank intervention
— may offset the nascent recovery. The risks from the currency
notwithstanding, panellists have raised their outlook for economic growth
this year by 0.2 percentage points, expecting a drop of “only” 0.4%.
Outlook for Euro Area reduced amid
US$ weakness and lacking domestic impetus
In Europe, the economic outlook is characterised by a lack of an impetus
needed to pull the economy clear from its current sluggish growth path.
Compared to the United States, monetary policy remains timid, as the
European Central Bank (ECB) seems keen to build up a strong credibility.
On 4 July, the Governing Council of the ECB decided that the minimum bid
rate on the main refinancing operations and the interest rates on the
marginal lending and deposit facilities will remain unchanged at 3.25%,
4.25% and 2.25% respectively. Owing to the already tight public sector
balances, a fiscal stimulus will also remain absent. And finally, the
current political settings across the continent render the implementation
of the much awaited structural reforms highly unlikely. Therefore, the
recovery of the European economy continues to hinge on a rebound in the
United States. However, the recent strength of the Euro against the US$
threatens to choke off an export-led recovery. Consequently, panellists
have lowered their GDP growth outlook for this year a notch to the current
1.2%.
No recovery
in Latin America this year
The growth outlook for the Latin American region suffered yet another
downward revision. Compared to last month, the aggregate GDP forecast
dropped 0.4 percentage points to 0.6%, squashing hopes that Latin America
will profit from a rebound in the United States and elsewhere. Not
surprisingly, Argentina was at the forefront of downward revisions, as
first quarter GDP numbers came in well below expectations at a staggering
drop of 16.3% year-on-year. Moreover, the government continues without the
vital support from the International Monetary Fund (IMF) and has announced
that it intends to advance the date for presidential elections six months
to March 2003 in order to stem the increasing potential for social unrest.
The Argentine economy is now seen to contract 13.5% this year and the
growth outlook for the coming year was halved over last month to a very
moderate 0.7% expansion.
Dimmer prospects for Venezuela and
Colombia amid political changes
Venezuela comes second in terms of downward revisions, down 1.3 percentage
points over last month. The political situation remains tense, as the
government is slow to reconcile its differences with the country’s
business community, thus thwarting a recovery of private investment. In
Colombia, the newly inaugurated President Álvaro Uribe is expected to
crack down harder on the country’s main guerrilla group FARC. While, this
may improve the long-term prospects of the civil war weary Colombia, in
the short term, counter attacks from the guerrilla forces may hit the
important oil sector and the country’s energy infrastructure. Consequently,
the outlook for this year’s economic growth was pared 0.4 percentage
points to 1.7%.
Brazil outlook fairly stable despite
eroding confidence
Surprisingly, Brazil was just marginally affected by eroding confidence
ahead of the October presidential elections, which threaten to bring
forward left-wing candidate Luiz Inácio da Silva (‘Lula’). Despite a
significant weakening of the currency and a strong spike in bond spreads
the outlook for this year was trimmed by only 0.2 percentage points over
last month.
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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