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Monetary policy remains unchanged in
Europe as ECB remains upbeat about growth prospects
The European Central Bank (ECB) did not follow the Federal Reserve Board’s
decision to lower interest rates. In its regular policy meeting of the
Governing Council on 7 November, just one day after the Fed’s rate cut,
the ECB decided to keep interest rates unchanged at 3.25%, 200 basis
points above the US policy rate. The Bank acknowledged that recent
short-term economic indicators and survey data suggest that activity in
the Euro Area is growing only moderately and below the levels expected
earlier, as geopolitical tensions, the evolution of oil prices and
developments in stock markets have affected the confidence of businesses
and consumers alike. However, with the current inflation rate hovering
around the upper end of the 0-2% zone, defined as price stability, the
Council has decided against a cut in interest rates. The decision was also
motivated by the rather upbeat assessment of the growth prospects for the
Euro Area. European monetary officials expect that economic growth in the
Euro Area will return to “rates close to potential” in the course of 2003.
The ECB further claims that private forecasters, on the whole, also seem
to share the same view. However, more recent forecasts show that this view
is changing rapidly. Panellists have again slashed their forecasts for
Euro Area growth in 2003 by 0.2 percentage points to 1.8%. This represents
the sixth consecutive downward adjustment in projections. In fact, as
recent as this last June the Consensus expected 2.9% growth for 2003. As a
result of increased market pessimism, the ECB has changed its bias and has
indicated that a rate cut may be ahead.
Sharp downward revisions to Latin
America while hopes for a cyclical rebound wane
The outlook for the Latin American region is deteriorating at an even
faster pace than in Europe. Compared to last month, the forecast for
average GDP growth for the eleven economies surveyed dropped another 0.4
percentage points to 2.5%. Moreover, the sharp drop in prospects follows
on a cut of equal magnitude applied to the GDP forecast last month. Thus,
over the past three month the accumulated downward revision has reached a
full percentage point. The downward adjustment to regional growth
prospects is mainly due to a dimmer outlook for the region’s two largest
economies, Mexico and Brazil.
Mexico suffers major downward
revision but remains region’s fastest growing economy
With close to 90% of total exports directed to the United States, the
Mexican economy depends strongly on the developments in the market of its
northern neighbour. The current slowdown of the US economy is more
pronounced in the manufacturing sector than in services, which develop
along a more stable trajectory. As a result, the Mexican economy, which
since the inception of NAFTA (North American Free Trade Agreement) in 1994
has increasingly developed into a manufacturing base for the United
States, is following the swings of the US economy with significant
oscillations. This explains the sharp 0.4 percentage point cut to next
year’s GDP growth forecast for Mexico over last month, as the US growth
prospects are also dimming. Nevertheless, with 3.6% projected growth,
Mexico is seen to be the fastest growing economy in the region, further
buttressing its position as the region’s largest economy.
Brazilians elect leftist
With Luis Inácio da Silva (“Lula”), Brazilians have elected the first
working class President in their history. Even though markets have reacted
favourably to the electoral outcome – the exchange rate has firmed and
bond spreads have dropped – the vicious circle has already initiated its
course. The political uncertainty ahead of the elections has prompted a
substantial weakening of the exchange rate, which now threatens to feed
through to rising inflation. The perception that the Central Bank will
miss this year’s inflation target and rising inflation expectations for
2003 have prompted monetary authorities to tighten their stance and reduce
the room for manoeuvre in the immediate future, which is likely to choke
off a tentative recovery. As a result, the GDP forecast for 2003 was
lowered 0.7 percentage points since last month to a lacklustre 1.5%
growth.
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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