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The development of the global economy in
2002 hardly merits the term recovery. Moreover, sentiment continues to
deteriorate, as hopes of a year-end acceleration evaporate. In the United
States, recent data suggest that the consumer -- the main buttress of the
current business cycle – is finally showing some signs of weakness but a
double-dip recession remains rather unlikely. Meanwhile, sentiment for
Europe is deteriorating markedly amid diminished prospects for economic
reform in Germany: Finally, the reduced growth forecast for the global
economy is feeding through to Latin America where forecasts were slashed
again. |
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Increased pessimism as war concerns
rise
The sentiment for global economic growth continues to deteriorate. The
forecast for aggregate global growth for this year was lowered by 0.1
percentage point since last month to 1.8%. With three quarters of the year
behind us, the downward revision is mainly concentrated in the final
quarter of the year, as expectations of a year-end acceleration are giving
way to a more subdued outlook for the global economy. Sluggish global
growth towards the end of 2002 is seen to carry over into next year, where
the outlook was lowered to 2.8%, 0.2 percentage points down from last
month. One reason for the downgrade is the increased likelihood of a US
war against Iraq. The majority of analysts now factor in a war to their
baseline forecasts, while last month a military conflict only constituted
an additional downside risk component to the forecasts. The global
economic impact of a US war in Iraq would certainly be negative but the
actual effect would depend to a great extent on the development of the
conflict, in particular the duration and potential impact on oil supplies
from the Persian Gulf region.
Global growth engine sputters with
Europe and Latin America providing strongest impediment to global growth
Given the role of the United States as the global economy’s growth engine,
one might think that the recent downgrade to global economic growth is
mostly concentrated in the United States. However, such a notion is not
corroborated by the current data. In fact, next to non-Japan Asia, the
United States is the only region, with no – further – GDP downward
revisions for this year. For next year, the economists lowered
US-forecasts by 0.3 percentage points. The most pronounced downward
revisions to next year’s global outlook occurred in Europe, where
projections have been lowered by more than half a percentage point, and,
to a lesser extent, in Latin America, where forecasts were lowered by 0.4
percentage points.
Buoyant consumption drives growth in
third quarter …
In the United States, consumer growth is likely to have spurred the
overall economy in the third quarter, as GDP growth is estimated to have
reached between 3.5% and 4.0%. August retail sales were very strong and
suggest that the American consumer remained the main underpinning force of
the US economy. However, the sales data were inflated by incentive-driven
motor vehicle sales whereas non-auto sales rose at much more moderate
levels.
… but pace begins to slow in
September suggesting weak – but positive – growth in final quarter, which
…
The current pace of consumption growth is unlikely to remain at the high
third quarter levels. In fact, September automobile sales softened
substantially. Total vehicle sales dropped in September and also remained
well below market expectations, despite the fact that most incentives
remained in place. Chain store sales data also suggest a sharp slowdown in
September consumer spending and the Institute for Supply Management (ISM)
factory index, slipped to 49.5 from 50.5 in August, falling under the 50
break point that divides growth from decline. The September ISM reading
represents the first contraction in U.S. manufacturing output in eight
months. However, the ISM cautioned that the index often slips and does not
necessarily portend that the manufacturing sector is tipping back into a
recession. While unemployment fell to 5.6% in September from 5.7% in
August, payrolls outside the farm sector dropped by 43,000, in contrast to
the 5,000 gain the market had expected. This was the first time in five
months that US payrolls fell. Finally, recent data suggest that housing
activity is decelerating, although it should remain at high levels in
light of the current propitious interest rate setting.
… is seen to carry over into 2003,
protracting recovery into second half
Taken together, the data suggest the remainder of the year could see a
marked pullback in growth from a robust pace of 3.5% to 4% in the third
quarter. Currently, the majority of panellists expects growth to slow to
above the 1% threshold in the final quarter. The key issue is whether a
fourth quarter slump remains a soft patch or constitutes the first phase
of a more prolonged economic erosion. Most panellists expect the slump to
continue into early next year, not the least since this is the most likely
moment for a US invasion of Iraq. Subsequently, the economy should gain
speed again, bolstered by accommodating macroeconomic policies -- the Fed
is expected to cut rates further this year – and a persistence of
productivity gains, which would bolster corporate profits and ultimately
lift employment. For the year as a whole, growth is seen to reach 2.8% in
2003, 0.3 percentage points below last month’s forecast.
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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