Latin America in a Global Context - Economic Briefing March 2003

War Concerns and Oil Price Spike Weigh on Global Outlook

The increasing likelihood of a war against Iraq has led to a surge in oil prices, which, next to the geopolitical uncertainties, threatens to exert additional downside pressure on the global economy and thus limit the potential for recovery in 2003. 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 Central Bank willing to act only cautiously, Europe lacks the ability to rekindle growth with classic policy tools. And in the United States, consumer confidence is battered by rising unemployment, spiking energy prices and the imminent threat of war with Iraq.

Global outlook lowered again
After only a brief pause of stabilising forecasts for the global economy last month, market sentiment is again deteriorating. This month, the average forecast for output growth in 2003 dropped from 2.5% in February to the current 2.4%. This month’s downward adjustment thus resumes the series of downward revisions, which with the exception of last month has lasted since June 2002, and which has sliced off a full percentage point from the global growth forecast over that time frame.

Most regions suffer downward revision as war concerns and high oil prices continue to loom
The downgrade is broad-based across economic regions. With the exception of non-Japan Asia, all economic areas suffered a minor downward revision. The outlook for the United States dropped a notch amid mounting concerns about the impact of a war on the world’s largest economy. Moreover, war concerns, higher energy prices and rising unemployment are eating away at consumer confidence, which has dropped to the lowest level in years. The Euro Area suffered an even more pronounced downward revision of 0.2 percentage points. The European Central Bank has lowered interest rates. However, given the necessity to rein in fiscal spending in the Euro Area’s largest economies, Germany and France, and their inability to move on economic reforms, the monetary loosening is unlikely to notably rekindle economic growth. The Consensus also lowered its outlook for Japan a notch since last month. Japan has nominated a new Central Bank president but without more radical structural reform measures the country’s economy will fail to pull clear from its meek growth trajectory. Finally, Latin America once again suffered a major downward revision, even though the picture lightened up for three economies in the region: Argentina, Ecuador and Peru. However, a moderate downward revision to the region’s largest economy, Mexico, and yet another sizeable deterioration in the Venezuelan outlook have sliced another 0.2 percentage points from the regional outlook to only 1.9%.

U.S. economy grew quicker than expected at the end of last year
According to preliminary estimates from the Bureau of Economic Analysis (BEA), real GDP expanded at an annual rate of 1.4% in the fourth quarter, twice the rate announced in BEA’s advance estimates. Despite the upgrade to the fourth quarter GDP numbers, the economy nevertheless registered a marked slowdown in the final quarter compared to the strong annual 4.0% pace registered in the third quarter. The fourth quarter slowdown primarily reflected a deceleration in private consumption, a downturn in exports and a deceleration in private inventory investment that, which were partly offset by acceleration in federal government spending, a smaller decrease in nonresidential structures, and an acceleration in residential fixed investment. In spite of the sizeable fourth quarter upgrade, the BEA left the full-year estimates unchanged at 2.4%.

Downside risks are weighing heavily on the outlook for the U.S. economy
Despite the rather resilient picture shown by the U.S. economy last year, the risks weigh more heavily on the downside, as the country battles with a rising likelihood war with Iraq, a spike in oil prices and mounting unemployment. In February, payrolls outside the farm sector plunged 308,000, the biggest decline since November 2001, when the economy shed jobs in the wakeSeptember 11. Even though some economists claimed that the unexpected increase – the market had anticipated an increase of 20,000 payrolls – was mostly due to transitory factors, such as the spike in energy prices and very unfavourable weather conditions, a job loss of this magnitude could announce a drop back into recession. Additional data corroborate the weakening of the economy on a broader front than anticipated. Consumer confidence is declining rapidly. According to the University of Michigan’s consumer survey, confidence declined yet again in February and has now reached the lowest level observed since 1993. Moreover, while potential war with Iraq remains an important source of economic uncertainty, the study indicates that even after a war, spending growth will remain sluggish, as consumers expect a slow and uneven rebound in jobs and incomes and report a greater desire to repay debts and rebuild their savings and reserve funds.