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Massive downward revisions to
European growth outlook
Europe is seen increasingly negative by the forecast panel. The growth
forecast for this year was lowered to 0.8%, down 0.2 percentage points
from last month. Given that the Euro Area’s GDP grew 1.4% in the first and
second quarter of this year, economists surveyed expect a notable slowdown
in the second half of the year. For 2003, the Consensus is even more
pessimistic. The outlook was reduced half a percentage point from 2.5%
last month to the current 2.0% forecast. One of the reasons for the
increased Euro Area pessimism are the results of the September elections
in Germany. The incumbent government of chancellor Gerhard Schröder won
the elections by a narrow margin, which could curtail its ability to
promote much-needed structural reforms in Europe’s largest economy.
Meanwhile, the European Central Bank (ECB) is caught between demands to
adopt a more accommodative monetary policy stance, on the one hand, and
the necessity to contain inflation, which remains close to the Bank’s
stated upper target of 2%. Moreover, higher oil prices threaten to fuel
inflation further in the months ahead, which would forestall any efforts
to lower rates to spur on sluggish growth.
Latin American outlook pared as
global growth concerns weigh
Apart from Europe, Latin America suffered the largest downward revision to
its growth outlook. The forecast for regional average growth in 2002 was
maintained unchanged over last month at 0.4% but the projections for the
coming year were lowered 0.4 percentage points since last month to 2.9%.
The increased pessimism over the Latin American region was reflected in
the September edition of the bi-annual World Economic Outlook published by
the International Monetary Fund (IMF). The IMF actually anticipates the
region to experience a recession this year, as the Argentine economy is
anticipated to contract by 16%, which is well in excess of the Consensus.
The difference between the IMF and Consensus is best explained not by the
more pessimistic assessment of Argentine prospects but rather due to
methodological reasons. The IMF calculates aggregate regional growth by
using weights based on purchasing power parity (PPP) for 2001. LatinFocus,
in contrast, calculates the regional average by weights, which constantly
adjust to the forecasts for GDP growth, inflation and exchange rate
variations. As a result, in terms of Latin America, LatinFocus weighs
Argentina at only half of the weight used by the IMF. Using PPP
methodology, this month’s Consensus growth rate for the region would be
-0.4%.
In contrast to previous downward revisions, which were mostly motivated by
domestic considerations, this month’s changes to the Consensus Forecast
are above all the result of increased pessimism over the global recovery,
as the revisions are most pronounced in Chile and Mexico, the two
countries, which so far steered clear of homemade troubles.
Chile particularly vulnerable due to
openness, dependence on copper and oil prices
The Consensus lowered its projection for this year’s Chilean GDP growth a
notch to 2.1%. Forecasts for next year were even lowered 0.5 percentage
points, as the diminished outlook for global growth will weigh heavily on
the region’s most open economy. The country will suffer further due to the
impact of lower global demand on copper prices. Finally, as an oil
importer, Chile will also pay a higher bill than other regional economies
if the Iraq conflict feeds into higher oil prices.
Mexico lowered in tandem with the
United States
Not surprisingly, Mexico suffered a similar cut to its growth outlook. Its
close commercial ties with the United States and Canada, formalised in the
North American Free Trade Agreement (NAFTA), have thus far shielded the
economy from Argentina and Brazil contagion, but force the economy to
follow the slide of its northern neighbour on a 1:1 scale.
Brazil also suffering but from
concerns over electoral outcome
Brazil also experienced a major downward revision to economic growth
prospects. However, the pessimism is, in part, due to domestic reasons, as
concerns about an electoral victory of left-leaning Lula have been
mounting over the past month. The forecast for GDP growth this year was
lowered by 0.3 percentage points to 1.1% and the outlook for 2003 was
pared by an even larger 0.5 percentage points to only 2.3%
Downgrades to Argentina reversed
On a positive note, the outlook for Argentina was hiked for a second
consecutive month, following a year of constant downward revisions.
Forecasts were lifted by 1.1 and 0.1 percentage points for 2002 and 2003
respectively. Nevertheless, the scope of recession this year remains at a
breathtaking 12.6% and the 0.5% growth anticipated for 2003 hardly merits
the term of a “cyclical recovery”.
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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