Latin America in a Global Context - Economic Briefing March 2003

War Concerns and Oil Price Spike Weigh on Global Outlook (continued)

ECB cuts interest rates amid sluggish growth outlook
In Europe, the outlook deteriorates at an even faster pace than in the United States. The Consensus pared its growth forecast from 1.6% last month to 1.4%. The European Central Bank (ECB) even went a step further and lowered its growth outlook for this year from 1.6% expected in December to the current 1.0%. The new ECB forecast for this year emerged as the monetary authority announced its decision to cut its key interest rate by 25 basis points to 2.5%, the second rate cut in four months. An interest rate cut was largely expected given the lackluster state of the Euro Area’s economies. However, most participants had anticipated the ECB to move more boldly and the move looks indeed paltry in the light of the large cut to the bank’s growth outlook. In the short term, the ECB remains concerned about the current level of inflation, which reached 2.3% in February, slightly up from 2.2% in January. However, the Bank believes the rise in oil prices to be the main factor behind the current price pressures and expects that more fundamental factors -- namely the significant appreciation of the euro vs. the US$ and the moderate pace of economic growth -- should dominate price developments again, once the oil price normalizes.

Outlook for Latin America cut again despite a better outlook in Argentina, Ecuador and Peru
The Consensus panellists have lowered the average GDP growth forecast for the Latin American region by 0.2 percentage points since last month. Contrary to the usual pattern, where most countries follow the same direction, this month’s adjustment reflects diverging trends. Three countries, Argentina, Ecuador and Peru, are believed to expand at higher rates than those expected last month. In Argentina, recent data suggest that the recovery will kick in earlier than expected and have prompted the Consensus to hike its forecast 0.3 percentage points since last month. A surprisingly robust economic performance in late 2002 has also lightened up the outlook for Peru. In particular, a surge in domestic demand promises that to enable the country to weather the climate of sluggish global demand better than its regional peers. Finally, Ecuador is likely to profit from solid start of the government of Lucio Gutiérrez and rising oil prices.

Mexico suffers from increasing doubts over U.S. recovery and Venezuela is seen entering into freefall amid continued political jitters
On the downside, three countries are seen less optimistically than a month ago. Mexico is now paying the price for its dependence on the U.S. economy, which had underpinned the country’s resilience in past years and had shielded the economy from regional contagion in Argentina, Brazil and, more recently, Venezuela. Now, the increasingly doubtful outlook for the U.S. economy is translating into sizeable downward revisions for Mexico, where forecasts for economic expansion dropped from 3.1% expected last month to the current 2.8%. Debt concerns, fiscal adjustment and continuing recession, are unlikely to enable Uruguay to profit from the improved outlook in neighbouring Argentina and panellists sliced 0.4 percentage points from last month’s forecast. Finally, Venezuela saw the biggest cut to the economic outlook for this year. The Consensus dropped a staggering 4.2 percentage points following on last month’s 6.5 percentage point cut, which represented the highest absolute drop ever registered since we started with the regular publication of Consensus Forecast data in 1998. Venezuela is now expected to contract 11.7%, as the continued political uncertainty is sending the economy into a free fall. This year’s decline follows on the 8.9% contraction in 2002, which already marked deepest recession observed in more than 50 years.