Latin America in a Global Context - Economic Briefing February 2003

Outlook for Global Growth Stabilises (continued)

Downward revisions to European growth outlook halted
Growth prospects for Europe continue to look dim. The European Central Bank seems to be mainly concerned with building a reputation as a guardian of currency stability and is acting only very cautiously on the monetary front. On the fiscal side, the economic policy hands are tied. After European governments have failed to take advantage of the propitious economic environment prevailing in the past years to trim structural deficits, the public balances of the major European economies are strained to the utmost and are either close to or exceeding the inflexible 3.0% limit imposed by the Stability Pact. Thus, there are no policy instruments at hand to stimulate domestic demand, which was barely positive last year, according to the latest estimates. This leaves the external side of the economy as the only functioning engine to pull the Euro Area economy clear from its sluggish state. However, with the global engine running below potential in 2003, the stimulus for external demand is limited. Moreover, if sustained, the recent appreciation of the Euro threatens to choke off the export engine and further limits the potential stimulus of the external sector. Nevertheless, the series of continuous downward revisions to the European growth outlook which has persisted since May last year is finally drawing to an end, but the 1.6% growth rate anticipated for 2003 is disappointing even by moderate European standards.

Latin American outlook sliced yet again as political crisis in Venezuela prompts huge downward revision to growth forecast
The outlook for aggregate economic growth in the Latin American region dropped 0.2 percentage points from 2.4% expected last month to the current 2.2%. With the outlook stabilising in most economic areas of the world this is particularly disappointing. However, with the exception of Colombia and Mexico, which experienced minor adjustments of only one tenth of a percentage point, the downward revision to the regional average is entirely due to Venezuela. The outlook for Venezuela was slashed 6.5 percentage points, the highest downward revision ever registered in a month since we started with the regular publication of the LatinFocus Consensus Forecast in 1998. The cut was applied as the nation-wide strike, which lasted through December, continued over the whole of January. The strike, which has brought economic activity in the Caribbean nation to a virtual standstill, has practically wiped out the first month from the national accounting books. Moreover, the deep rift going through the Venezuelan society, which has split the nation into Chávez supporters and opposition, has only experienced a brief respite and is unlikely to be solved any time soon. Thus, uncertainty is likely to continue to overshadow the economy and the political landscape. As a result, the economy, which typically follows the boom and bust cycles set by oil price fluctuations, stands a good chance to miss the opportunities given by the current oil price bonanza.