Latin America in a Global Context - Economic Briefing January 2004

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.

And the winner is …
With 2003 just ended, the first actual indicators are trickling in and even though most indicators have yet to be reported, big surprises should mark the exception.  Therefore it is an opportune moment for review, taking a closer comparative look at the surveyed countries before all attention is focused on 2004.  Latin America emerges from a disappointing year.  After two years of virtual zero-growth, last year did not bring a rebound.  On average, the region did not live up to expectations at the beginning of the year, as not even half of the moderate growth of 2.4% expected in January 2003 materialized.  According to the latest estimates, the region grew barley more than 1% last year.  However, the average is mostly drawn down by Brazil and Mexico, which account for 70% of total economic activity and both disappointed in 2003.  There are also a number of success stories.  

Argentina emerges from years of drought
In 2003, Argentina was the fastest growing economy in Latin America, expanding by 7.3%, according to the latest Consensus estimates.  Given the string of upward forecasts, growth may even end up coming in higher yet.  Final growth numbers have not come in for any country yet but the distance to the second-fastest growing economy, Peru, is sufficiently large to call Argentina a certain winner in this category.  Naturally, the impressive growth rate could only be achieved on the back of a devastating recession that held a grip over the country for four consecutive years and culminated in a double-digit contraction in 2002.  Nevertheless, a rebound of this magnitude was anything but certain.  In August 2002, when the sentiment about Argentina’s economic prospects hit rock bottom, the market expected a meagre 0.4% expansion in 2003.  Moreover, the strong growth momentum is likely to carry over into this year, where Argentina is seen in second place in terms of economic growth, behind Venezuela, which takes Argentina’s place as the economy recovering from a double-digit recession.  But even two years of impressive economic growth in Argentina are not sufficient to erase the marks left from the four recessionary years and the devaluation.  Per capita income, which reached US$ 8,365 in 1998, the last pre-crisis year, will not even reach half that level even if the optimistic scenario in market expectations is realised.  The country that led its regional peers in terms of wealth for many decades is now just a notch above average and is unlikely to take the top spot from Mexico anywhere in the near future.   

Mexico does not live up to expectations as economy delinks from the United States
While remaining at the top spot in terms of GDP per capita for the Latin American region, 2003 was a year of stagnation for Mexico.  The economy barely expanded by more than 1% at a time when the U.S. economy experienced record growth not seen in two decades.  The delinking of the Mexican economy from the United States is certainly the most important and disconcerting development in 2003.  Since the inception of the North American Free Trade Agreement (NAFTA) in 1994, the Mexican economy was boosted by the establishment of U.S. factories along the border, the so-called maquiladoras, which took advantage of cheaper labour south of the border.  As the number of these in-bond manufacturing plants grew, the development of the Mexican economy became increasingly intertwined with economic developments in the United States.  This shielded the country from the emerging market crises of the late 1990s and even from spill-over effects from Brazil in 1999 and Argentina in 2002.  However, it also sent the country nose-diving when the U.S. engine started to sputter in 2001.  Hopes ran high that once the U.S. economy rebounded Mexico would follow suit.  At the beginning of last year, the Consensus still expected the economy to grow at a 3% plus pace this year.  However, as the U.S. recovery took an ever firmer hold, it became evident that the link of the Mexican economy with its Northern neighbour had weakened substantially.  In part, the apparent delinking can be explained with a lagging recovery of the U.S. manufacturing sector which trailed overall developments in the economy, as Mexico is first and foremost tied to the U.S. via the manufacturing sector.  However, the delinking is due also to increased competition from other countries that are emerging as a production base for multinational companies, in particular China.  China has increasingly become a notable threat to Mexico, particularly after the integration of the country in the global economy, which was formalised with the recent entry into the World Trade Organization (WTO).  As a result, an increasing number of firms have established new plants in China and even dislocated existing plants in Mexico to the Asian production hub.  

Venezuela suffers from political battles
Venezuela carries the red lantern in 2003.  The country had a poor start into the year, as a nationwide general strike staged by the opposition to force President Chávez into resignation, led to a virtual standstill of economic activity from December 2002 to January 2003.  As a result, two-months were practically wiped off the national accounting books.  The oil industry, the country’s economic backbone, was slow to recover to full pre-crisis output levels.  The non-oil economy is still not fully on the way to recovery as the political uncertainty emanating from the battle for political leadership in the country remains high and continues to prompt businesses to delay or abandon investment decisions altogether.