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European Central Bank remains
reluctant to stimulate growth with further rate cuts
In Europe, recent data confirm that economic activity was very weak in the
second quarter of 2003. In fact, according to preliminary data from the
statistical agency, Eurostat, the economy in the Euro Area exhibited zero
growth on a quarter-on-quarter basis. However, survey data suggest that
confidence is recovering, which should translate into higher consumption
later in the year. This improvement and positive developments in the
financial markets have prompted the European Central Bank (ECB) to expect
the Euro Area economy to turn upwards at the beginning in the second half
of the year and to strengthen even further in the course of 2004. The more
upbeat outlook is also reflected in the European Commission’s
indicator-based model for quarterly GDP growth, which anticipates Euro
Area growth to pick up to a range of 0% to 0.4% for GDP growth in the
third quarter of 2003, accelerating to 0.2% to 0.6% in the fourth quarter
of 2003. According to the Commission, the acceleration in the fourth
quarter would be due both to domestic factors (as suggested by the
improvement in retail confidence) and to external factors, particularly
the growth in U.S. demand. The improved but still very moderate outlook
and resurfacing inflationary pressures – according to preliminary data,
inflation reached 2.1% in August, a notch ahead of the ECB’s target – have
prompted monetary authorities to maintain interest rates unchanged.
Recently, the Organisation for Economic Co-operation and Development
(OECD) encouraged the ECB to cut interest rates further to facilitate
economic growth if signs of a recovery do not emerge in the near future.
The OECD has cut its Euro Area growth forecast for this year from 1.0%
expected earlier to just 0.5%. Consensus Forecast panellists share the
more sombre economic outlook and have cut their 2003 GDP forecast yet
another 0.1 percentage point over last month to the current 0.6%. The
Consensus sees only limited potential for a recovery next year, expecting
the economy to expand just 1.8%, unchanged from last month’s forecast.
Latin American outlook cut again amid deteriorating prospects for Brazil
The outlook for Latin America was cut yet again. Compared to last month,
the average 2003 GDP growth forecast for the region dropped a 0.1
percentage point to 1.4%. The latest adjustment continues the series of
downward revisions which have persisted since the end of last year, when
regional GDP was expected to expand 2.6%. However, rather than reflecting
a deterioration in the prospects for all countries in the region, this
month’s cut was almost entirely motivated by a deterioration in the
Brazilian outlook. In fact, with the exception of Uruguay which largely
depends on the economic development of Brazil, all other countries are
either seen unchanged or better than last month.
Argentina, Colombia and Venezuela
seen more positively than last month
The cut to the Brazilian outlook followed on the release of output data
for the second quarter, which showed that the country unexpectedly slipped
into a recession. On the other hand, three of the seven major economies,
Argentina, Colombia and Venezuela have experienced upward revisions to
their growth outlook compared to last month. In Argentina, Consensus
Forecast panellists lifted the 2003 GDP growth forecast by a 0.1
percentage point to 5.7%. 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 over last month,
as low interest rates spur investment and a more competitive exchange rate
drives the external sector. Finally, Venezuela is also seen more
optimistically than last month, as forecasts were hiked 0.6 percentage
points. However, even such an improvement is virtually insignificant in
the context of the double-digit recession that will cripple the Venezuelan
economy this year.
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