Latin America in a Global Context - Economic Briefing September 2002

Renewed Concerns over US Recovery

The global economy is still set for a recovery this year albeit at a slower pace than anticipated earlier. In the United States, recent data suggest that the consumer -- the main buttress of the current business cycle -- remains unperturbed by uncertainty over the development of the economy and a double-dip recession appears rather unlikely. Nevertheless, the reduced growth forecast for the United States is feeding through to other global regions, eating away further at an already lacklustre growth outlook.

Global economy seen expanding at lesser pace amid slower US growth and higher oil prices
The past month has fuelled concerns about the path of the global economy further. In particular, the United States is seen expanding more moderately than last month. The increasing pessimism over the world’s largest economy is feeding through to a subdued growth outlook for the global economy. The current global political situation, with a potential US attack on Iraq does not help in this context. On 6 September, oil prices surged to their highest levels in a year on growing market fears of a US assault on the oil exporting nation. The international benchmark Brent crude oil, which has already climbed more than a third this year on war concerns, jumped to US$ 28.5 a barrel in London, its highest level since September last year. As a result of lower US growth and higher oil prices, Europe, Japan and Asia are being viewed more pessimistically compared to last month. In Latin America, the repercussions of a protracted global economic recovery is beginning to dominate the domestic causes for sluggish growth.

Concerns over US growth prospects mount
The sentiment over the US economy has worsened significantly since last month. The official downward revisions to previous gross domestic product (GDP) numbers and subdued growth in the second quarter (for details see last month’s edition of the LatinFocus Consensus Forecast) is bearing down on the optimists who had expected the rebound observed in the first quarter to continue at a more moderate pace. Instead recent indicators suggest that the economy may face additional hurdles before rebounding to its potential growth rate next year. Nevertheless, while the economists polled for the US outlook have become considerably less enthusiastic about this year’s prospects and also see 2003 more negatively, only a minority expect the United States economy to face the dreaded double dip recession. The vast majority of analysts anticipate continuous positive growth in the quarters ahead. For this year as a whole, GDP will expand 2.4% according to this month’s Consensus, down 0.2 percentage points from last month’s forecast. The growth projection for next year suffered a cut of the same magnitude to 3.1%

Latest data provide ambiguous signs over economic growth trajectory
Recent economic data suggest that the majority is right about not expecting a double dip recession. Propped up by ongoing incentives, vehicle sales jumped in August defying consumer confidence indicators which suggest less buoyant spending patterns. In August, the Index of Consumer Sentiment (ICS) of the University of Michigan was 87.6, down from the 88.1 recorded in July. However, the downward momentum in consumer confidence observed in the past months came to a halt in August (see chart). In addition to the aforementioned incentives, vehicle sales may also have been spurred on by lower unemployment. In August, the unemployment rate unexpectedly fell to a five-month low of 5.7% from 5.9% in July, as companies and the government added workers to their payrolls for a fourth month. The positive vehicle sales data is also reflected in healthy manufacturing figures. According to the Institute for Supply Management (ISM), manufacturing activity grew for the seventh consecutive month in August (see chart). However, the reading was below expectations and new orders softened, which was a cause for concern, according to the manufacturers’ association.

Japanese economy again seen gloomier
The very brief period of increasing optimism about the Japanese economic outlook has once again given way to increasing pessimism. On average, the Consensus Forecast panel has lowered its 2002 outlook for the economy from a 0.4% decline expected last month to a 0.5% contraction. Moreover, the growth forecast for 2003, when the economy is seen to enter positive territory again, was reduced a notch from the modest 1.2% expansion expected last month. In part, the downward revision is due to a more sombre outlook for the US economy. The Japanese economy depends on exports to revive growth and the United States is seen as the key engine for the Japanese economy, as is reflected in the current account positions of the two countries.

However, domestic factors also played an important part in the downward revision. First, due to a new national accounting methodology, GDP growth in the first quarter, which had previously been reported at 1.4%, was lowered to zero growth. Second quarter GDP growth was seen in positive territory (+0.5%) but more recent data suggest that Japanese companies scaled back their capital spending for the third consecutive quarter, which implies that GDP numbers will probably be revised downward. Moreover, according to a recent survey, business sentiment in the July-September period dropped for the first time in three quarters, indicating that Japanese companies are growing increasingly pessimistic regarding the business outlook. Finally, unemployment remains close to an all time high at 5.4% and consumer prices continue to fall. In fact, panellists have raised their deflation forecast for next year a notch since last month to 0.4%, a sign that deflation will maintain its debilitating grip over the Japanese economy.



 

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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