Latin America in a Global Context - Economic Briefing August 2002

Concerns over Recovery in United States

The global economy will recover from sluggish growth last year but an increasingly sombre outlook for the United States and Europe is forestalling a more robust rebound. In the United States, the capital markets meltdown threatens consumption, which has buttressed the economy in the current business cycle. So far, the majority of economists do not foresee the American economy to fall into a double-dip recession but concerns over the strength of the recovery are increasing. A protracted recovery in the US would be bad news for Latin America, which will experience yet another year with sub-par growth.

Global outlook reduced amid concerns over US recovery

The global economic growth outlook was lowered a notch since last month, as forecasts for the United States and Europe were reduced. The cut represents the first downward revision this year after a string of five consecutive upward revisions to the global growth outlook had come to a halt last month. In the United States, downward revisions to past GDP data indicate that the economy experienced a more pronounced recession than believed earlier. Moreover, the accounting scandals and the meltdown in capital markets now threaten to undermine consumption, the backbone of the economy in the current business cycle. The more sombre outlook for the United States is spilling over unmitigated to Europe where a domestic impetus to rekindle growth remains absent, as the will for unpopular structural reforms is absent and the Central Bank remains cautious about easing monetary policy. The outlook for Japan remained unchanged amid persistent uncertainty over next year’s budget. The average GDP growth forecast in Latin America also remained unchanged. However, the stability is due to statistical effects, as the GDP weight for recession-ridden Argentina declines. In fact, apart from Mexico, all countries experienced cutbacks to their economic growth projections.


USA – Heading towards the double dip?

The data releases for the United States economy since the last edition hardly could have been more disappointing. First, past GDP data were revised downward, showing a deeper and longer recession than believed previously and thus ending speculations about whether or not the United States had been in recession. In its regular annual revision of national income data, the Bureau of Economic Analysis (BEA) stated that the revised estimates show that real GDP growth was 0.3% in 2001, compared to the previous 1.2% growth figure. Moreover, the new data show that the downturn in real GDP lasted from the first quarter through the third quarter last year and not, as previously reported, only in the third quarter (see chart). Finally, this year’s first quarter recovery also turned out more subdued than believed earlier. The revised numbers show that GDP expanded by “only” 5.0% in the first quarter this year instead of the previously reported 6.1% and that the growth pace slowed to 1.1% in the second quarter over the same period last year, less than half the rate expected by the market. According to the BEA, the deceleration in real GDP growth in the second quarter primarily reflected slowdowns in inventories and in personal consumption, in particular non-durable goods registered a marked deterioration. A downturn in government spending and a deceleration in residential fixed investment also contributed to the slump. An acceleration in export growth and an upturn in equipment and software partly offset the slowdown in other sectors. Finally, imports accelerated sharply in the second quarter.



More recent data corroborate the view that the US economy will recover at a more moderate pace than reflected in previous forecasts. The July Purchasing Managers Index (PMI) of the Institute for Supply Management (ISM, formerly known as NAPM) dropped a strong 5.7 points to 50.5 points, the lowest level observed since January this year. According to the ISM, a weak showing in new orders, which may indicate a slowdown in inventory replenishment, was the key factor behind the July decline. Other components of the indicator such as production and employment also showed notable declines, which raises concerns over the resilience of the current recovery.


Concerns about the slowdown were fuelled further by weak employment data. Labour market data show that July payroll employment rose by only 6,000, substantially below market expectations of 50,000. Even though job market data typically lag behind economic developments and thus do not provide insight into the future trajectory of the economy, the labour market numbers are worrisome, as they may foreshadow a coming slowdown in consumer spending.



Risk of double-dip recession remains low -- so far

The American consumer, the backbone of the past business cycle, has already been battered by the equity market meltdown in the past months, which was fuelled by the collapse in confidence in corporate accounting practices. A further blow to the consumer may tip the balance and prompt a decline in consumption, which would most likely drag down the entire economy and prompt the dreaded double-dip recession.


According to the University of Michigan consumer survey, consumers have become increasingly convinced that the accounting and financial scandals will slow the pace of economic growth and as a result have adopted a more cautious outlook. The index of consumer sentiment fell to 88.1 in the July 2002 survey, the lowest level recorded in six months. The consumer sentiment Index declined by nearly 5% in each of the past two months, falling from 96.9 in May and 92.4 in June. Finally, the consumer expectations index, a closely watched component of the index of leading economic indicators, was 81.0 in July, down from 87.9 in June and 92.7 in May. The two-month decline of nearly 13% reduced the expectations index to its lowest level since last November. Despite the recent declines, however, both indices remained above the levels consistent with sparking absolute declines in consumer spending. Therefore, the outlook is for slower but still positive growth in consumer spending, as consumers shift their emphasis toward increasing their savings as a precautionary measure to help meet retirement goals.


So far, the economists polled for the Consensus remain fairly upbeat about the prospects for the US economy. However, the 2.6% growth rate expected fell a notch short of the 2.7% expected last month and thus represents the second consecutive downward revision to this year’s outlook following on a period of ever increasing optimism in the first half of the year. Moreover, the GDP growth forecast for 2003 was trimmed 0.2 percentage points over last month to 3.3%.



 

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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