Latin America in a Global Context - Economic Briefing August 2003

Global Economy Close to Recession (continued)

Outlook for Latin American growth revised downward yet again
After a brief respite last month, the outlook for 2003 output growth in the Latin American region was cut a notch over last month, continuing the series of downward revisions which have persisted since the end of last year, when regional GDP was expected to expand 2.6%. Currently, Consensus Forecast panellists expect the Latin American economy to grow by just 1.5% in 2003. While the regional average continues to drift downward, not all countries are seen more negatively compared to last month. In fact, three of the seven major economies, Argentina, Colombia and Venezuela have experienced upward revisions to their growth outlook since last month.

Argentina, Colombia and Venezuela seen more positively than last month
The upward revision was most pronounced in Argentina, where Consensus Forecast panellists lifted the 2003 GDP growth forecast by 0.4 percentage points to 5.6%. This growth rate puts the Southern Cone economy at the helm of all other economies in the region. However, the rebound follows on four years of recession, which have devastated the economy and it will take more than a year of buoyant growth to return to pre-crisis output levels. The outlook for Colombia improved a notch since last month, as low interest rates are spurring investment. Venezuela is also seen a notch more optimistically than last month. However, a one tenth of a percentage point improvement is insignificant in the context of the double-digit recession that will cripple the Venezuelan economy this year.

Downward revisions in Brazil, Mexico and Peru
The upgrades in the growth of outlook of three countries are contrasted with downward revisions in an equal number of countries, with Chile unchanged. Mexico suffered the highest cut from 2.0% growth expected last month to the current 1.7%. Despite a favourable interest rate environment – the benchmark Cetes rate dropped to new historic lows in July – the country suffers from a lack of impetus from the U.S. economy. However, the budding sings of hope for the U.S. manufacturing industry augur well for Mexico, which is likely to rebound strongly once a full recovery in the U.S. rekindles demand for Mexican manufactures. The outlook for Brazil, the other regional behemoth, also experienced a downgrade as the tight credit environment renders an expansion of consumption and investment more difficult than expected. Finally, the outlook for Peru was lowered from 4.1% expected last month to the current 3.9%, as it becomes evident that past growth rates are unsustainable given the current mix of economic fundamentals.