Latin America in a Global Context - Economic Briefing November 2003

Global Economy Developing at Robust Pace

The global economy is developing at a more robust pace in the second half of the year than anticipated earlier. As a result, optimism for a pickup in global economic activity continues to rise. However, even with a year-end rebound, total output growth this year will remain moderate and just marginally above last year’s level. The U.S. economy resumed its position as the global growth engine. In the third quarter, the economy expanded at the highest rate in almost two decades. Even though the current pace is clearly unsustainable, the U.S. economy is seen expanding at a robust pace in the near future. The Japanese economy, which had been ailing along for a decade, is showing clear signs of a pickup and stands to profit from the rebound in the United States and continued resilience of its Asian trading partners. Europe and Latin America are in positions of stark contrast to the improved outlook for other regions. The Euro Area will only narrowly escape a recession this year and the outlook for Latin America was revised downward yet again amid a protracted recovery in Mexico and sombre developments in Brazil.

Global growth forecast lifted again
The outlook for global economic growth continues to improve. The average forecast for global output growth this year was raised a 0.1 percentage point from the 2.3% expected last month to the current 2.4%. The improvement represents the third consecutive upward adjustment to the global growth outlook and ends the series of downward revisions, which has characterised most of the year. As was the case last month, the upward revisions were concentrated in the United States, non-Japan Asia and Japan. Upward adjustments were incremental in the U.S. (+0.2 percentage points) and non-Japan Asia (+0.1 percentage point) but the outlook for Japan surged again by 0.4 percentage points following almost a full percentage point increase last month. In contrast, the outlook for Europe remained unchanged over last month and the growth projection for Latin America dropped yet another notch.

U.S. economy grows at fastest pace in almost two decades propelled by tax cuts and mortgage refinancing
The U.S. economy once again surprised on the upside, growing well ahead of market expectations in the third quarter. According to advance estimates by the Bureau of Economic Analysis, gross domestic product (GDP) increased at an annual rate of 7.2% in the third quarter, more than double the 3.3% growth rate observed in the second quarter and the fastest clip in almost 20 years. The actual growth rate also surprised markets, which had expected the economy to grow by a strong 6.0%. Markets had anticipated strong growth since the personal income tax cuts implemented by the Bush administration became effective in July and a record surge in home-mortgage refinancing indicated that homeowners would have more cash to spend.

Personal consumption key behind rebound as Americans maintain appetite for durable consumer goods
Consequently, consumer spending constituted the key behind the third quarter acceleration. In the third quarter, personal consumption expenditures increased 6.6% over the same quarter last year, following on 3.8% growth in the second quarter. The third quarter figure was the fastest pace observed since the first quarter of 1988. As in the second quarter, durable consumer goods represented the fastest growing sector, mushrooming by 26.9%, topping even the buoyant 24.3% observed in the second quarter. But non-durable goods also gained speed (Q3: +7.9% year-on-year; Q2: +1.4% yoy), whereas services only added 2.2%, following on 1.4% growth in the second quarter.

Housing booms and exports thrive
Favourable financial conditions also boosted the housing sector, where activity increased by 20.4%, following on 6.6% in the second quarter. Business spending also experienced an acceleration, increasing 11.1%, the fastest pace since the first quarter of 2000. The external sector also added almost one percentage point to total GDP growth owing to a strong export expansion and stagnant imports. Finally, defence spending, which had accounted for more than half of second quarter growth, remained flat over the same period last year, despite the ongoing conflict in Iraq.

Sizzling pace unsustainable but growth will remain robust
Obviously, the current pace of economic expansion is unsustainable. The main drivers behind the third quarter expansion – namely the tax cuts and the favourable refinancing conditions - were of one-time nature. Therefore, the boom in durable consumer goods and housing in particular will give way to more moderate increases once the one time bolstering effects subside. In fact, the summer boom should reduce future growth rates, since the past spending surge brought consumers’ durable goods investment closer to their needs, leaving less pent-up demand for the future. Nevertheless, the economy should continue to grow at a vigorous pace. According to the Consensus, the economy will expand a robust 4.4% in the final quarter of the year. However, the output expansion should slowly trail off to 4.2% in the first and 4.0% in the second quarter of 2004. The surprise in the third quarter and the brighter prospects in the near future have prompted Consensus Forecast panellists to raise their outlook for the full year of 2003 by 0.2 percentage points over last month to the current 2.7%. The projection for 2004 rose by the same amount to the current 3.8%.