Latin America in a Global Context - Economic Briefing December 2003

Higher Growth in U.S. and Japan Provide Year-end Boost

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 driven principally by the U.S. economy, total output growth this year will remain moderate. The U.S. economy resumed its position as the global growth engine. In the third quarter, economic activity expanded at the highest rate in almost two decades and even though the current pace is clearly unsustainable, the U.S. economy will continue 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 increasingly important 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 remains subdued amid a protracted recovery in Mexico and sombre developments in Brazil.

Third quarter GDP revised upwards as U.S. economy grows at fastest pace in almost two decades propelled by tax cuts and mortgage refinancing
The U.S. economy is living up to its role as the global growth engine, firing up all cylinders. According to preliminary estimates released by the Bureau of Economic Analysis, gross domestic product (GDP) increased at an annual rate of 8.2% in the third quarter of 2003, following on 3.3% growth in the second quarter. The previously reported advance estimates had GDP growing at 7.2%. The current pace of economic growth was the fastest in almost two decades and was primarily driven by personal income tax cuts implemented by the Bush administration. These tax cuts, which became effective in July, and a record surge in home-mortgage refinancing provided consumers with extra cash.

Personal consumption accelerates as Americans maintain appetite for durable consumer goods
Consequently, consumer spending constituted the key behind the third quarter acceleration. In fact, personal consumption expenditures increased 6.4% in the third quarter 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 1988. As in the second quarter, durable consumer goods represented the fastest growing sector, mushrooming by 26.5%, topping even the buoyant 24.3% observed in the second quarter. But non-durable goods also gained speed (Q3: +7.6% year-on-year; Q2: +1.4% yoy), whereas services only added 2.1%, 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 22.7% even stronger than the advance estimate (+20.4% yoy) and more than triple of the 6.6% growth registered in the second quarter. Business spending was also revised upwards. Gross fixed investment increased by 14.0%, almost twice the 7.3% growth observed in the second quarter and the fastest pace since the first quarter of 2000. The external sector also contributed 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.

Record pace is unsustainable but growth likely to remain robust
Clearly, the current pace of economic expansion is unsustainable. However, first indicators for the fourth quarter suggest that economic growth will remain vigorous over the short term. In October, new orders for U.S. manufactured goods climbed at their fastest rate in over a year, providing further evidence of a revival in the long-slumping factory sector, and the Institute for Supply Management index of manufacturing activity rose to 62.8 in November, the highest level in almost 20 years. So far, buoyant economic activity has not yet translated into lower unemployment. The number of new weekly claims for unemployment benefits has hovered stubbornly around 400,000, the standard benchmark for labour-market weakness and non-farm payrolls increased just 57,000 in November, far lower than forecasts for a bumper increase of 150,000. According to the Consensus, the economic growth will slow down to 4.0% in the final quarter of the year, where it will remain in the first half of 2004. The third quarter growth surprise and brighter prospects for the near future have prompted Consensus Forecast panellists to raise their annual outlook for 2003 by 0.2 percentage points over last month to the current 2.9%. The projection for 2004 rose by the same amount to the current 4.0%.

U.S. economy plagued by sizeable imbalances in external and fiscal balances
The resilient growth in the United States does not come without a cost however. Both, the current account and fiscal balances are exhibiting sizeable deficits. The current account deficit is seen to reach a staggering 5.0% of GDP this year. Moreover, the deficit will remain at that level, according to the Consensus, despite the rapid weakening of the US$ in recent months. On a positive note, the current account deficit underscores the functioning of the U.S. economy as the global growth engine. Apart from a one-time boost which prompted the sizzling growth observed in the third quarter, the fiscal deficit will have no longer lasting benign impact on economic growth. On the contrary, the rapidly rising fiscal deficit has concerned an increasing number of economic institutions, among them the International Monetary Fund (IMF) and the Federal Reserve Bank. Forecasts for this year’s deficit are slowly diminishing to the current 3.8%. However, next year, the fiscal deficit will rise further to 4.4% of GDP.