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Europe remains paralysed in a state
of anaemic economic growth
According to the European Commission’s Autumn 2003 Economic Forecast, the
weak economic performance observed in the Euro Area at the end of 2002
continued throughout the first half of this year and growth is likely to
disappoint for a third consecutive year. In its latest estimate, the
Commission cut growth projections for this year from 1.0% to 0.4%.
However, with accommodative macroeconomic policy conditions, continued
disinflation, supportive financial conditions, progress in structural
reforms and a reduction in geopolitical uncertainty, businesses and
consumers are regaining confidence, while simultaneously the international
environment is improving. Therefore, the Commission expects the Euro Area
economy to recover with 1.8% growth next year. In 2005, the Commission
sees Euro Area growth at 2.3%, close to its potential growth rate of 2.5%.
However, the Commission warns that considerable risks exist to this
outcome. Failure to finish structural reforms, a possible fall in
real-estate prices, further appreciation of the euro, the imbalances in
the U.S. economy and more political unrest in the Middle East could tip
the balance against a recovery. The new Commission forecasts, published on
29 October, are mainly in line with market expectations. The Consensus has
the Euro Area’s GDP growth this year at 0.5%, unchanged from last month
and a notch above the Commission’s outlook. In 2004, the Consensus expects
the Euro Area economies to expand by 1.7% on average.
Outlook for Latin America continues
to deteriorate, amid worse projections for Brazil and Mexico
The series of downward revisions to the Latin American growth outlook this
year continues even two months before the conclusion of the year. With the
exception of July, the average GDP growth outlook was continuously revised
downward during the year from 2.6% expected in December 2002 to the
current 1.2%. This month’s downward revision was only a 0.1 percentage
point due to the fact that upward revisions to the outlook for Argentina
and Venezuela partly mitigated downward revisions to Brazil and Mexico. In
Mexico, disappointing data imply that the country will only slowly follow
the impressive rebound of the U.S. economy. The lag behind the United
States is further exacerbated by increased competition from China, which
threatens to erode Mexico’s position as the preferred manufacturing base
for U.S. corporations. As a result, the Consensus Forecast for 2003 GDP
growth dropped yet another notch since last month to 1.5%. In Brazil,
participants continue to revise growth estimates to reflect the poor first
half showing and a lower likelihood that the pick up in the final quarter
of the year will be sufficient to bolster annual growth notably. The
annual growth forecast has been lowered 0.1 percentage point notch over
last month to the current 0.6%.
Improved
outlook for Argentina and Venezuela
Argentina, in contrast, is experiencing a solid rebound from the last four
years of recession. Since November last year, when sentiment about the
potential for recovery in the Southern Cone economy was at a low with only
0.6% growth expected for this year, the perception of the ability to
rebound from the crippling recession has increased. The Consensus Forecast
for growth has increased by 0.5 percentage points over the last month to
the current 6.5% growth rate expected for this year. Venezuela experienced
a 0.4 percentage point upward revision. However, even so the country will
experience a historic double-digit recession, as the political turmoil and
foreign currency and price controls continue to take a heavy toll on the
economy. Moreover, the potential for a cyclical rebound is assessed more
pessimistically. Compared to last month, the Consensus lowered the GDP
outlook for next year a full 1.4 percentage points to 5.3%.
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