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The forecasts for global economic growth
this year are hovering around levels considered by many as a recession. Even
the United States will grow at subdued rates, despite unprecedented policy
stimulus. Interest rates remain at decade-lows and the fiscal deficit is
approaching levels that would make investors nervous if registered in any
Latin American economy. The major European economies are hanging at the
brink of recession, although the situation may improve soon amid some
encouraging signs that governments may act on much needed reforms. On a
positive note, the outlook for Asia, is seen more optimistically, as the
impact from the lung disease SARS is not as severe as feared earlier.
Finally, the prospects for economic growth in the Latin American region are
disappointing, as a strong rebound in Argentina is offset by a double-digit
recession in Venezuela and sluggish growth in the two regional behemoths,
Brazil and Mexico. |
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With the first month of the third quarter over, the series of downward
revisions to the global outlook is drawing to an end. The average forecast
for global output growth this year remained unchanged since last month at
2.0%. Compared to last month, both the United States and Europe are seen a
notch more pessimistically, whereas the outlook for Japan remained
unchanged. The output growth projection for non-Japan Asia was even lifted
a notch compared to last month, as the impact of the SARS epidemic on the
economy is less pronounced than anticipated earlier. Despite positive
signs in some Latin American countries, the average outlook has worsened
yet again, as the outlook for the region’s two largest economies, Mexico
and Brazil, deteriorated over last month.
Economy surprises to the upside in
the first quarter
In the United States, economic indicators released in the recent past
paint a more positive image than portrayed in last month’s edition. Gross
domestic product (GDP) increased at an annual rate of 2.4% in the second
quarter of 2003, according to advance estimates released by the Bureau of
Economic Analysis on 31 July. The reading came in well ahead of market
expectations of 1.5% growth and also represented an acceleration over the
first quarter, when GDP expanded by 1.4%. However, the positive
development was largely inflated by strong increases in military spending,
which posted its biggest three-month increase since the Korean War (1951),
adding a whopping 44.1% in seasonally adjusted annual terms. Without
military spending, GDP growth would have been just 0.7% in the second
quarter. Personal consumption and fixed investment also contributed
positively to the second quarter reading, partly offset by negative
contributions from inventories and the external sector. While the heavy
dependence on military spending comes as a disappointment, the development
of business investment, which has lagged during the recovery from the 2001
recession, showed definite signs of revival in the second quarter.
Investment recovers from two-year
slump
Gross fixed business investment increased by 6.9% year-on-year, following
on a long period of contraction. The investment overhang, built up during
the late 1990s, had been one of the key drivers behind the current slump.
Since the end of 2000, business investment had remained mired in recession
until the fourth quarter of 2002, when the sector expanded by 2.3%. Hopes
that this was a longer-lasting turning point were squashed, when
investment fell back into negative territory, contracting by 4.4% in the
first quarter. If sustained, the pick-up in investment could mark the
beginning of a more robust economic recovery, which most analysts had
expected to kick in earlier. Consumer spending also developed favourably.
In the second quarter, personal consumption rose 3.3%, propelled in large
part by a 22.6% rise in durable goods spending. The growth rate was well
ahead of the 2.2% growth recorded in the first quarter and puts the
rebound on a broader and more solid footing.
Latest data suggest upswing will
continue
Latest economic data releases were also point upwards. The Institute for
Supply Management (ISM) Chicago index climbed to 55.9 in July, its highest
level since January, and up from 52.5 in June. Productivity advanced by
5.7% in the second quarter, more than twice the rate observed in the first
quarter and unemployment claims dropped. According to the Labor
Department, initial claims for unemployment benefits remained below the
400,000 mark for the third straight week in the work week ending on 2
August, suggesting that the pace of layoffs is slowing. Finally, anecdotal
evidence suggests that retail sales were strong in July, implying a good
start into the third quarter. As a result of the positive readings, the
U.S. economy is seen to expand 2.2% this year, accelerating to 3.4% next
year, the fastest growing economy with the exception of non-Japan Asia.
Recession officially declared over
but fiscal balances severely strained
In mid-July, the business cycle dating committee at the National Bureau of
Economic Research (NBER) declared that the U.S. economic recession that
began in March 2001 ended just eight months later in November. The
recession, thus, lasted less than average for recessions since World War
II and was also relatively mild in scope. However, the NBER also believes
that the economy, in particular employment, has not returned to good
health yet, despite the unprecedented support given to the recovery by
both monetary and fiscal policies. Policy stimulation is coming at a cost
though. Substantial reductions in income tax rates, increased investment
incentives, extended unemployment benefits and higher defence and
security-related spending are straining the fiscal balances. Since the
fiscal surplus peaked at 2.4% of GDP in 2000, fiscal accounts have
deteriorated to 1.3% of GDP surplus in 2001 and to a deficit of 1.7% of
GDP last year. Furthermore, the deficit continues to deteriorate at a
rapid rate. According to this month’s Consensus Forecast, the federal
government will incur a deficit equivalent of 4.0% of GDP, which is down
another 0.4 percentage points over last month’s forecast and continues the
trend of downward revisions observed since May last year, when economists
expected the government to generate a fiscal surplus. In a recent study,
the International Monetary Fund (IMF) even warned that with the economic
slowdown also weighing heavily on revenues at the state and local level,
the combined balance of the general government could reach a deficit of 6%
of GDP in 2003.
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