Latin America in a Global Context - Economic Briefing December 2002

Outlook for Global Growth Continues to Deteriorate

Even though the risks for a military conflict in the Middle East have been substantially reduced since last month, Consensus Forecast panellists remain sceptical about the robustness of next year’s recovery. With the exception of non-Japan Asia, all regions seem to lack the necessary impetus to rekindle economic growth. In Europe, the lack of political will to tackle the necessary economic reforms hampers a more robust economic performance, particularly in Germany. Meanwhile, a change in key economic positions in the US government may lead to a more inspiring contribution from the political side.

Global outlook revised downward amid weaker growth assessments in United States and Japan
The optimism about a global economic recovery, which had reached its height this summer, continues to dwindle. The global economic growth outlook for next year was lowered yet another notch over last month to the current 2.6%. The downward revision is due to more moderate expectations for the United States, where Consensus Forecast panellists lowered their forecasts by one tenth of a percentage point to 2.6%, and to a downgrade of equal magnitude to the Japanese growth outlook. The projections for Europe were left unchanged after massive downward revisions in the preceding months. Latin America also remained unchanged on average, as a downgrade to the Mexican forecast was compensated for by more positive assessments for Argentina and Brazil.

U.S. third quarter GDP revised upward
The United States economy is showing remarkable resilience in the light of massive reductions in wealth and lingering uncertainty about geopolitical stability. Economic growth in the third quarter, previously reported at 3.1% (advance estimates), was revised upward. According to preliminary estimates from the Bureau of Economic Analysis, real gross domestic product (GDP) increased at an annual rate of 4.0% in the third quarter of 2002, following on 1.3% growth in the second quarter. The main drivers behind third quarter growth were personal consumption, government spending, equipment and software, private inventory investment and exports. The contributions of these components were partly offset by a drop in non-residential structures and by higher imports.

Slowdown anticipated in final quarter …
Most analysts continue to presage a substantial slowdown in the final quarter of the year, as the current pace of consumption growth seems unsustainable. Car sales, which in large part had been responsible for the positive consumption figures so far, had been boosted by massive incentives from the automobile industry, which instigated consumers to advance car purchases before these incentives would be scrapped. The advance purchase effect is likely to wane soon. Moreover, the American consumer, the main buttress of the US economy, has suffered considerable declines in personal wealth, which also may undermine the desire to consume. Indeed, latest data from US car manufactures suggest that vehicle sales slumped in November. However, other data tell a different story. The Commerce Department reported that personal consumption expenditures rose 0.4% in October, reversing a 0.4% decline in September and outpacing the increase in personal income of 0.1%. October represented the first month since July that consumer spending, which accounts for roughly two-thirds of U.S. economic activity, outpaced the personal income growth rate. Moreover, the increase in October spending was the largest since July's 1.1% gain, a sign that consumers are easing their hold on the purse strings and may be less worried about the direction of the economy, a notion also supported by the fact that the personal saving rate also dropped in October.

… but consumers start off hopeful into holiday spending season
The encouraging signs emanating from spending data are corroborated by consumer confidence gauges. In November, the consumer confidence index of the University of Michigan rebounded notably over October, when it had dropped to the lowest level since 1993. The development was mirrored by the Conference Board's consumer confidence index, which also rebounded in November following five months of declines. According to the Conference Board, the rebound in expectations suggests consumers do not expect economic conditions to worsen, which signals a brighter holiday spending season than was anticipated a month ago. Indeed, anecdotal evidence suggests a good start into this year’s holiday spending, as consumers are apparently willing to continue exercising their pivotal role for the US economy. However, spending could begin to taper off soon in light of increasing unemployment, which has unexpectedly surpassed the psychologically important 6% threshold in November, the highest level since a peak almost nine years ago.

Bush administration restructures economic cabinet
On 6 December, the Bush administration undertook a major restructuring of the economic cabinet. Both Lawrence B. Lindsey, the Assistant to the President for Economic Policy and Director of the National Economic Council at the White House, and Paul O'Neill, the U.S. Treasury Secretary, were released from their cabinet portfolios. During a good share of its term, the current administration has been criticized for its failure to communicate effectively on economic policy, a shortcoming which, some observers argue, has contributed to a persistence of subdued business and consumer confidence and has stifled more favourable developments in the economy. The selection of new cabinet members is likely to be monitored closely, as markets are seeking a positive contribution from the political arena.



 

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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