Latin America in a Global Context - Economic Briefing May 2003

SARS Replaces Iraq War as Main Cause for Subdued Global Outlook

Just as the global economy could take a breath after the conclusion of hostilities in Iraq, the pneumonia variant SARS is beginning to creep up in the concerns of economists. While, the economic impact so far remains confined to Asia, if SARS extends over a longer period, the severe impact on the Asian economies would also spill over to other areas. Meanwhile, dismal readings in the United States suggest that the economy is not yet in for a rebound even though consumer confidence is picking up and macroeconomic policies are providing a strong stimulus. European economies face a more adverse setting. Strained budgets and strict rules render further fiscal stimulus impossible. Simultaneously, the European Central Bank is moving cautiously in order not to taint its young reputation as a staunch inflation fighter, despite the fact that a stronger Euro provides the necessary manoeuvring room.

Global outlook pared amid weaker prospects for the U.S., Europe and Asia
On 1 May, President Bush declared that the military phase of the war of the Anglo-American coalition against Iraq is over. The official ending of hostilities paves the way for a rebound in consumer and business confidence, which had been battered badly amid the preparations for war earlier this year. However, as economists are once again turning their eyes from the geopolitical arena to the fundamentals underlying current economic developments, the picture seems anything but rosy. Forecasts for growth in the United States were cut a notch, as first quarter figures came in disappointing and the Federal Reserve even is considering its options in the case of deflation. In Europe, monetary authorities are reluctant to use the only policy tool available to rekindle economic growth in the light of fiscal deficits hovering at the limits set by the Stability and Growth Pact. Moreover, the Euro Zone now has to battle the adverse effect of a weaker US$, which threatens to choke off the region’s export engine. Consequently, the prospects appear even dimmer than last month and growth now is seen barely above 1%. The outlook for Japan remained unchanged over last month but the dismal 0.8% “growth” outlook hardly merits the term. Finally, Asia, the only economic area which seemed to have escaped the war concerns unperturbed, is now battling the effects of an atypical pneumonia (SARS, Severe Acute Respiratory Syndrome).

Asia battling adverse SARS effect
SARS was already recognized at the end of February 2003 but moved to the focus of media attention during April, as the number of affected countries and people has increased rapidly. According to the World Health Organization (WHO), as of 9 May, a cumulative total of 7,183 probable cases of SARS and 514 deaths have been reported from 30 countries on six continents. However, even though the disease has spread to all continents it remains concentrated in Asia, particularly China, where authorities report cumulative totals of 4,805 probable cases and 230 deaths. While the numbers in themselves may seem low, the economic consequences are not negligible, as the authorities have enacted severe measures to avert further spreading of the disease. In its Asian Development Outlook 2003, released on 28 April, the Asian Development Bank (ADB) stated that the recent outbreak of SARS in one of the risks to the Asian economies next to the further weakening in the growth prospects for industrial countries. Only two weeks later, on 9 May, the ADB corrected its outlook and revised its projections downward from the original report. According to the new report, gross domestic product (GDP) growth in 2003 could decelerate to 5.3% for East Asia (original report: 5.6%) and to 3.4% for Southeast Asia (original report: 4.0%), if SARS extends over the second quarter of 2003. Hong Kong and Singapore would be the most affected economies, as GDP growth has been reduced by 1.8 percentage points to 0.8% and by 1.1 percentage points to 1.9%, respectively. China would see a GDP deceleration of about 0.2 percentage points to 7.3%, while Korea would experience a drop in GDP growth to 3.8%. Under a second scenario, if SARS extends into the third quarter of 2003, East Asia’s GDP growth could slow to 4.7% while Southeast Asia’s growth might decelerate to 2.5%. The ADB notes that one bright spot is the possibility of a rebound in private spending once SARS is brought under control. Consumers may quickly compensate for their reduction in consumption, whereas foreign travelers and investors are likely to take a longer period to return. Finally, so far, the economic impact remains confined to Asia, as the United States and Canada only count 30 and 29 probable cases respectively (9 May).

United States economy picks up speed in first quarter but remains below expectations
The United States economy continued to grow along the more moderate growth pattern observed at the end of 2002. In the first quarter, GDP increased at an annual rate of 1.6%, according to advance estimates of the Bureau of Economic Analysis (BEA), a small uptick in pace compared to the 1.4% annual growth in the fourth quarter of last year. The advance estimates are based on incomplete data that are subject to further revisions. Preliminary estimates for the first-quarter, based on more comprehensive data, will be released on 29 May. According to the BEA, personal consumption expenditures, residential fixed investment, and government spending were the main drivers behind first quarter growth, partly offset by negative contributions from private inventory investment, equipment and software and exports. Even though consumer spending still contributed positively to growth, the 1.4% annual growth represents a slowdown compared to 1.7% growth observed in the fourth quarter. In fact, consumer spending was the most disappointing component of the first quarter GDP release and was also responsible for the fact that the overall GDP reading remained well below market expectation of 2.0% growth. Moreover, the deterioration of consumption is concentrated in services spending, which grew at the slowest pace in 12 years. Services are a much less volatile GDP component than durable consumer goods and the current slump may augur a longer period of weakness in consumer spending. Finally, business investments fell 4.2%, returning into negative territory where they had lingered for two years already, after only one quarter of growth.