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Japanese economy poised for mild
recovery but fiscal confusion persists
In Japan, the economy remains on its way to a moderate recovery amidst a
blurry fiscal policy outlook. According to preliminary data from the
Cabinet Office, the index of leading economic indicators in June was 70.0
on a scale of 100 -- well above the neutral reading of 50. The government
claimed that the figures confirmed that the economy hit bottom in the
first quarter this year and had swung into a mild recovery cycle in the
second quarter amid a stronger external sector. Moreover, private-sector
machinery orders increased 2.9% in June, well above market expectations
and an indication that capital spending may pick up in the near future.
However, Prime Minister Junichiro Koizumi’s attempts of deeper-going
structural reforms are gridlocked in his own Liberal Democratic Party (LDP),
as Koizumi appears to be battling an ever rising tide of anti-reformers
within his party. Hence, even prospects for next year’s budget remain
unclear. Nevertheless, panellists have maintained their forecasts
unchanged since last month and continue to expect a 0.4% contraction this
year, improving to a mild 1.2% recovery in 2003.
Euro Area recovery remains sluggish
The market sentiment for a recovery in Europe has deteriorated markedly
since last month. The Consensus for economic growth this year declined a
notch to 1.1% and the outlook for 2003 even suffered a 0.2 percentage
point downward revision when compared to the July edition. At the heart of
the problem is the absence of any stimulus from within the Euro Area,
which could pull the economy clear from its current sluggish growth
trajectory. Despite increasing unemployment – the jobless rate increased
from 8.3% in May to 8.4% in June, according to the European Union's
statistical agency, Eurostat – governments seem unwilling to tackle
unpopular reforms to add flexibility to the labour market, a key
impediment to lower unemployment rates. Prospects for improvement on the
monetary front are beginning to emerge. In its last meeting on 8 August,
the European Central Bank (ECB) indicated that it may soften its stance
and loosen monetary policy in the months ahead. The ECB stated that the
economic upturn was likely to continue but that uncertainty about the
strength of the recovery continued to linger because of financial market
weakness.
Regional growth forecast unchanged
despite worsening outlook for a number of countries
In Latin America, the regional average growth forecast remains unchanged
since last month at 0.6%. However, the stability in the regional average
is deceiving since its rests on statistical effects only. The devastating
developments in Argentina continue to reduce the relative economic
importance of the country in the region, which is reflected in a lower
Argentine weight in the regional average. In fact, Argentina’s position in
the ranking of Latin American economies moved from number three – a
position held throughout the past decades – to number four. Moreover, with
a weight of just 5.4% in the eleven economies surveyed in our publication,
Argentina is just a notch short of dropping to number five behind civil
war-torn Colombia. Only last year, the weight of the Argentine economy in
the regional average was almost three times the current weight and more
than twice the weight of the number four economy, Venezuela.
Significant downgrades to growth
outlook for Argentina, Brazil and Venezuela – Mexican outlook unchanged
Despite the unchanged regional average, the outlook for the Latin American
economies continued to deteriorate significantly since last month, as
virtually every country in the region experienced a downward revision to
its growth outlook. Once again, Argentina leads the pack with 0.4
percentage point drop to its 2002 GDP growth forecast, relatively
insignificant when compared to the scope of the recession, which is seen
to reach a devastating 13.9%. The country remains without a vote of
confidence from the International Monetary Fund (IMF). Without the vital
financial support from the IMF, there is little hope that the country can
pull clear from the recession, as rising unemployment, growing
inflationary pressures, currency depreciation and tight credit are
suffocating the domestic economy. The Consensus grows increasingly
pessimistic about the growth outlook for Venezuela despite a favourable
development of oil prices and has lowered the growth forecast for this
year by 0.7 percentage points to a 4.2% contraction. Political uncertainty
remains a key impediment to a recovery of business confidence and the
monetary setting is affected by rising inflationary pressures in the wake
of the recent devaluation.
Panellists have lowered their growth projection for Brazil by 0.3
percentage points to 1.7%, amid further currency weakening, which renders
the monetary environment more challenging. However, the forecasts do not
yet reflect the 8 August approval of the US$ 30 billion IMF package, which
has alleviated market concerns about Brazil’s ability to service its debt
for the time being and should provide a boost to business and consumer
confidence. Despite the more sombre outlook for the United States, the
economists polled for Mexico maintained their forecasts for this year’s
growth unchanged at 1.6%, as recent data suggest that a cautious recovery
is on the way.
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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