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Increasing pessimism about Euro Area
as region’s largest economy is ailing
Europe also did not escape unscathed from the gloomier global economic
picture. Just as in Japan, the diminished prospects of an export-led
recovery, due to a weaker than anticipated US economy, clouds the outlook
for the European economy. In Germany, torrential rainfalls have caused
economic activity to grind to a halt in large parts of the country.
Nevertheless, while the floods are unlikely to have a sizeable impact on
economic activity this year, excessive spending pledges for flood damages
ahead of the 22 September elections threaten to erode the stability pact
of the Euro Area. In addition, the development of recent indicators raises
concerns about the German growth trajectory. The Ifo Institute’s business
climate index, a closely watched leading indicator for future economic
developments in Germany, dropped for the third consecutive month in
August. The August decline implies that the incipient recovery could be
stalled at least temporarily. Growth this year in Europe’s largest economy
could come in even below 0.5%, according to the Consensus’ pessimists. The
other major economies in the region are hardly doing better: Italy is seen
expanding just a notch quicker than Germany and France is unlikely to grow
much faster than 1%. On average, the Euro Area 2002 growth forecast was
lowered a notch from last month to 1.0%. Moreover, pessimism also appears
to be taking hold over participants expectations for next year, as the
forecast was lowered 0.1 percentage point to 2.5%.
Latin American growth outlook cut
again
The growth outlook for Latin America was lowered yet again. The average
2002 GDP growth forecast for the eleven economies surveyed in the
LatinFocus Consensus Forecast dropped a 0.1 percentage point to 0.4%. Next
year’s growth projection was lowered 0.2 percentage points. This month,
however, the downgrade seems more motivated by the increasing pessimism
about a rebound of the global economy in the second half of the year,
whereas previous downward revisions had been stirred by domestic issues --
namely the Argentina financial crisis, eroding investor confidence in
Brazil and political crisis in Venezuela. Therefore, it is hardly
surprising that Chile, the region’s most open economy, has received one of
the strongest downward revisions, as the outlook for that country was
pared 0.4 percentage points. Nevertheless, the 2.2% growth projected for
2002, which is felt by many in the country as a situation of economic
crisis, still ranks Chile as one of the region’s fastest growing
economies.
Venezuela suffers largest reduction
to GDP growth
Only Venezuela has experienced a higher downward revision to this year’s
growth outlook than Chile. The GDP forecast was lowered 0.5 percentage
points and the country is now seen to experience a 4.7% recession. The
collapse of the economy comes in spite of the fact that oil prices – the
single most important determinant of the country’s economic well-being –
are at their highest levels since September last year. However, the deep
division between the country’s political and business leadership is
forestalling private sector investment and a broad-based economic upswing.
Brazil seen more pessimistically
despite IMF assistance
Brazil also suffered a 0.3 percentage point downward revision to this
year’s growth outlook. Despite the US$ 30 billion agreement forged with
the IMF, panellists assess the prospects of the region’s largest economy
more negatively than last month. Next to considerations originating in the
political sphere – the leftist candidate “Lula” remains firmly established
in the first place in recent polls for the upcoming 6 October presidential
elections – consumption seems set to remain depressed for the remainder of
the year.
Downgrades to Argentina come to a
halt
The only positive news comes from battered Argentina. The country
experienced the first upward revision to this year’s GDP forecast in more
than a year. However, the 0.2 percentage point upgrade is hardly noticed
in the light of the fact that the country is expected to undergo its worst
recession in the past 50 years. Despite the upgrade, GDP is still expected
to contract a staggering 13.7%.
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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