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ECB cuts interest rates to rekindle
growth
On 5 December, the Governing Council of the European Central Bank (ECB)
announced its decision to lower the key ECB interest rates by 50 basis
points from 3.25% to 2.75%. This was the first rate cut since November
2001, when the Bank slashed rates in unison with the U.S. Federal Reserve
Board in the wake of the 11 September events. The rate cut did not come as
a surprise since most analysts had expected a 50 basis point downward
adjustment following the change in bias indicated by monetary officials in
November. The Bank justified its decision with increasing “evidence that
inflationary pressures are easing, owing in particular to the sluggish
economic expansion” and also stated that downside risks to economic growth
have not vanished.
European Commission’s cautious assessment of growth prospects in line with
market forecasts
The Central Bank’s subdued assessment of the economy is shared by the
European Commission. According to first estimates for the third quarter of
2002, Euro-zone GDP increased by only 0.3% over the preceding quarter
(+0.8% yoy). And the official European Commission economic outlook even
anticipates the possibility that the Euro Area could fall into outright
negative growth in the first quarter next year. For the final quarter of
the year, the indicator-based model for quarterly GDP growth for the Euro
Area forecasts GDP growth in a range of 0.2% to 0.5% quarter-on-quarter.
For the first quarter of 2003, quarter–on- quarter growth is anticipated
to be in the range of -0.2 to 0.2%. The negative assessment is mainly due
to recent developments in both U.S. and EU survey indicators, and
financial variables but is still seen as being compatible with the
baseline scenario of a gradual recovery in the course of 2003.
Consequently, the Commission anticipates GDP growth to pick up to 1.8% for
the full year 2003, after 0.8% growth in 2002. The current Commission
forecast is thus exactly in line with the Consensus for 2003 and just a
notch too optimistic for 2002 according to the market.
Forecasts for Latin America show
contrasting developments
In Latin America, adjustments for next year’s growth outlook have only
affected the region’s three largest economies: Argentina, Brazil and
Mexico, whereas the outlook for other economies was left virtually
unchanged. The projections for Argentina and Brazil were revised upward
substantially, while Mexico, on the other hand, experienced a strong
downward revision. The upgrade to Argentina’s growth forecast is more an
adjustment to actual developments in the economy rather than due to
positive signs emanating from the country. The economy is performing
slightly better than anticipated. However, recession continues to hold a
firm grip on the country and the contraction is likely to have remained
within the double-digit range in the third quarter of the year. Argentina
continues to lack the approval of the International Monetary Fund (IMF),
which is perceived as pivotal for recovery.
Brazil profited from a perception that stronger export growth is likely to
help lift the economic expansion, as lower interest rate will help to
bolster domestic demand. The downgrade to Mexico’s outlook goes in tandem
with a more pessimistic assessment of the U.S. economy. Just as Mexico has
profited from massive demand for cheap labour from the United States
during the second part of the 1990s, it now suffers from lower demand for
manufacturing, as that sector is particularly affected from the current
slump. In November, the Institute for Supply Management (ISM) index for
the U.S. manufacturing industry remained below the 50 point threshold,
which indicates a weakening in the manufacturing sector.
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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