Latin America in a Global Context - Economic Briefing December 2003

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

European economy recovering
In Europe, a silver lining is appearing on the horizon. According to first estimates for the third quarter, the Euro Area economy expanded by 0.4% over the previous quarter (+0.3% yoy). In the second quarter, the Euro Area economy had contracted 0.1% (+0.1% yoy). In fact, even though growth was barely positive in the third quarter, the Euro Area economy expanded at the fastest pace in a year. Exports constituted the main driver behind third quarter growth, expanding by 2.2% quarter-on-quarter, following on a 0.6% contraction in the second quarter. Consumption, on the other hand, remained unchanged over the previous quarter, which actually represents a deterioration over the already very meagre 0.1% growth observed in the second quarter. Investment remained the weak spot, declining at 0.5% qoq, the same dismal rate that was observed in the second quarter. Despite growth in the third quarter, which slightly exceed expectations, the European Commission maintained its outlook unchanged, anticipating a moderate acceleration in the speed of economic recovery. According to the European Commission’s indicator-based model for quarterly GDP growth, economic activity in the Euro Area will expand 0.2% to 0.6% in the fourth quarter of 2003, accelerating slightly to 0.3% to 0.7% in the first quarter 2004.

Projections for Latin America continues to deteriorate amid disappointing developments in Brazil and Mexico
The series of downward revisions to the Latin American growth outlook this year is drawing to an end in the last month of the year. So far, with the exception of July, the average GDP growth outlook for this year has been continuously revised downward from 2.6% expected in December 2002 to the current 1.2%. However, with a 0.06 percentage point drop over last month’s forecast it was a close call. The stability in the regional forecast conceals sizeable shifts in the outlooks for individual countries.

Mexican economy de-linking from United States rebound
Just as last month, the two regional behemoths experienced yet another downgrade to this year’s growth projection. In Mexico, disappointing data for the third quarter suggest that the country is de-linking from the United States, as the actual development was far cry from record growth in the United States. Consequently, Consensus Forecast panellists have lowered their forecast a notch since last month to the current 1.4%. Moreover, concerns that Mexico’s position as the preferred manufacturing base for U.S. corporations will be further eroded by China, have prompted Consensus Forecast panellists to shave 0.2 percentage points from the 2004 outlook over last month’s forecast. In Brazil, participants continue to lower growth estimates in the wake of the poor showing in the first three quarters. The growth forecast for 2003 was lowered 0.2 percentage points over last month to the current 0.4%. However, the reduced growth this year seems to raise the potential for a cyclical rebound next year, as the Consensus for 2004 GDP growth rose 0.2 percentage points to 3.5%.

Argentina rebound stronger than expected
Argentina, in contrast, is seen increasingly optimistic as the rebound from the last four years of recession is more robust than anticipated. Since November last year, when sentiment about the potential for recovery in the Argentine economy was at a low of only 0.6% growth expected for this year, the perception has increased continuously. The estimate over the last month was adjusted up another 0.3 percentage points to the current 6.8%. Three Andean nations, Colombia and Peru are also seen a notch better than last month, as third quarter developments proved better than expected.