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Consumer confidence jumps after the
Iraq war but not sufficient to kick-start the economy
It should be noted, however, that the first quarter was overshadowed by
preparations for the Iraq war, which sent consumer confidence to the
lowest level in almost a decade and prompted businesses to postpone
investment decisions. According to first post-war gauges, the confidence
in the economy is improving again. The University of Michigan consumer
sentiment index jumped 8.4 index-points to 86.0 in April, following the
fall of Baghdad. However, the monthly gain was about half the 17.3 point
gain recorded in March 1991 following the first Iraq war and is a far cry
from the 93.0 level observed April 2002. Therefore, even though the survey
concludes that a renewed recession is now unlikely, the recent surge will
not guarantee more rapid growth this year. According to the survey,
consumers expect the economy to improve but they do not anticipate that
the renewed economic strength is sufficient to lower the unemployment rate
anytime soon. A sustained revival in job and wage prospects would be
crucial for a full restoration of consumer optimism.
Deflation worries rising
On its 6 May meeting, the Federal Reserve policymakers assessed the up and
downside risks to economic growth to be roughly equal, as disappointing
recent readings on production and employment are being compensated for by
lower oil prices, bolstered consumer confidence, and strengthened debt and
equity markets. However, the Federal Open Market Committee has identified
another risk: deflation. While avoiding the term, the Fed statement claims
that “the probability of an unwelcome substantial fall in inflation,
though minor, exceeds that of a pickup in inflation from its already low
level”. So far, the Fed has decided to keep its target for the federal
funds rate unchanged at its 40-year low of 1.25%. However, the Fed also
indicated that it would not hesitate to lower rates further if the economy
does not pick up in the wake of improved consumer confidence and lower oil
prices. Moreover, Fed officials have said that they have additional tools
at hand should inflation fall further, such as buying U.S. Treasury notes
from private owners to pump an unlimited amount of money into the economy.
Forecast for Latin America unchanged
The forecast for the Latin American region is unchanged on balance
compared with last month. Only two countries, Argentina and Mexico
experienced notable changes to this year’s GDP growth outlook, with the
effects neutralising each other. The forecast for Argentina was raised yet
again, as evidence that the economy has left the trough behind is
accumulating. Moreover, political uncertainty about the leadership of the
country is waning. Even though the first round of the presidential
election brought Carlos Menem ahead of Néstor Kirchner, the latter is
almost certain to win the second round slated for 18 May. The forecast for
Mexico was lowered a notch in the wake of the more subdued outlook for the
U.S. economy, which remains the key for economic well-being of Mexico. |
