Latin America in a Global Context - Economic Briefing - February 2003

Outlook for Global Growth Stabilises

Despite an increasing likelihood of a war against Iraq, the series of downward revisions to the global growth outlook has come to a halt. But the potential for recovery in 2003 is limited. With the exception of non-Japan Asia, all regions seem to lack the necessary impetus to return to potential growth. The Japanese economy continues to ail along, as the government fails to address fundamental misalignments. With fiscal deficits running high and a cautious Central Bank, Europe lacks the ability to rekindle growth with classic policy tools. Meanwhile, the U.S. economy benefits from stimulating policies but at the cost of mounting fiscal deficits in the future.

Deterioration of 2003 economic outlook finally drawing to an end
The economic outlook for this year is beginning to stabilise, albeit at a level that barely qualifies as a recovery from sluggish global growth last year. Nevertheless, the continuous decline in the Consensus Forecast for 2003 global growth, which has lasted throughout the last eight months and has sliced off almost a full percentage point from the average growth projection, has finally come to an end. Despite the fact that the military conflict between the United States and Iraq now seems inevitable, this month’s 2.5% output growth forecast is unchanged from last month’s forecast. Obviously, the detrimental impact of the war with Iraq on the global economy had already been fully factored into the outlook by most analysts. Consequently, the outlook for the United States, Europe and Japan remains unchanged over last month and only non-Japan Asia and Latin America have experienced downward revisions of 0.1 and 0.2 percentage points respectively. Thus, Latin America constitutes the only economic region which has seen a notable downward revision to this year’s outllok.

U.S. economy slows significantly in final quarter of 2002
As expected, the U.S. economy slowed down considerably towards the end of last year. According to advance estimates from the Bureau of Economic Analysis (BEA), real GDP expanded at an annual rate of 0.7%, in the fourth quarter, following on the strong 4.0% pace registered in the third quarter. The fourth quarter slowdown primarily reflected a sharp deceleration of private consumption (down to +1.0% year-on-year from +4.2% yoy in the third quarter) and downturns in private inventory investment and exports. These detrimental effects were partly offset by a smaller decrease in nonresidential structures and by accelerations in government spending and residential investment. Imports increased slightly more than in the third quarter. Despite the fourth quarter slowdown, the U.S. economy expanded a respectable 2.4% in 2002, according to the advance BEA estimate (“preliminary" estimates, based on more comprehensive data, will be released on 28 February), which represents a significant improvement compared to the 0.3% increase in 2001. This year, the economy is likely to gain only a little speed. On average, panellists expect the U.S. economy to expand 2.6% this year, with the spectrum ranging from 2.1% on the pessimistic to 3.0% on the optimistic end of the forecast range.

Uncertainty about Iraq war and diminishing confidence in economic policy constitute major downside risks
Despite the rather resilient picture presented by the U.S. economy, the risks seem to weigh more heavily on the downside, according to the most recent indicators. In January, the economy added jobs at the fastest rate in more than two years and the jobless rate sank to a four-month low of 5.7%. However, the data is likely to have been exaggerated by quirks in retail hiring and the methodology by which the government smoothes out the data series to account for seasonal fluctuations. Moreover, the official unemployment rate only counts individuals looking for work and neglects discouraged workers. According to recently revised statistics from the Department of Labor, the economy has lost more than two million jobs since the recent recession began in March 2001, a drop of 1.5%, as layoffs have continued even as economic growth resumed. The lack of employment opportunities has fed through to slower wage growth, which in combination with continued erosion of wealth in stock markets, threatens to eat into future consumption. According to the University of Michigan’s consumer survey, confidence declined in January, as consumers expressed greater concerns about their future financial prospects. The study claims that the potential war with Iraq is now an important source of economic uncertainty and that consumers will become more apprehensive about the economic impact of the war and the potential for domestic terrorism as the beginning of the war nears. Moreover, the study states that despite the tax package announced by President Bush (details see January edition), confidence in government economic policies is now at its lowest level since President Bush first took office, with more consumers judging Bush’s economic policies unfavorably than favorably in the January survey.