Latin America in a Global Context - Economic Briefing - February 2004

United States Leads Way to Recovery

After two years of anaemic growth the global economy is set to rebound this year.  Moreover, the sentiment for the strength of this year’s recovery is improving.  Led by increased optimism over the prospects of the U.S. economy, other regions are also seen more favourably.  In particular, non-Japan Asia will experience yet another year of buoyant growth, provided that fears of the potential spread of epidemics do not resurface.  Japan seems to have emerged from an ongoing growth slump observed over the past years, as rising external demand from Asia and the United States provides for the necessary impetus to rekindle domestic demand.  The major European economies, on the other hand, continue to lag behind in the economic cycle and while a recovery is likely to take hold this year growth will remain moderate.  Finally, Latin America will rebound with a sizeable economic recovery.  However, the region is unlikely to live up fully to its potential for a cyclical rebound following  three years of weak growth.

Economic growth slows but remains robust
As expected, U.S economic growth trailed off towards the end of the year compared to the exuberant pace observed in the third quarter but remained robust.  According to advance estimates released on 30 January by the Bureau of Economic Analysis (BEA), gross domestic product (GDP) increased at an annual rate of 4.0% in the fourth quarter over the same quarter in 2002..  While the market had anticipated a slowdown, the scope came somewhat as a surprise, as the actual outcome was 0.8 percentage points below expectations of 4.8%.  In the third quarter, the economy had grown 8.2%, the fastest pace in two decades.  Based on the preliminary numbers, growth for the full year came in at 3.1%, following on 2.2% growth in 2002.

Consumer spending slumps after buoyant third quarter
The fourth quarter slowdown reflected a deceleration in consumer spending.  In the third quarter, consumer spending had grown a very robust 6.9% in the wake of advance payments of the child tax credit.  This credit had inflated growth of durable consumer goods to 28.0%, a rate that was clearly unsustainable.  In fact, the third quarter run on consumer durables seems to have eaten into the consumer appetite for big-ticket items in the fourth quarter, as growth receded to an anaemic 0.9% in the year-end quarter.  Growth in total consumer spending decelerated to 2.6%, as the slowdown in non-durable goods and services was less pronounced than in durable goods.

Investment and external sector also contribute to slowdown
Next to the deceleration in consumption, lower contributions from investment and the external sector also played a part in the slowdown.  Gross fixed investment increased at little more than half the pace registered in the third quarter but still expanded a very respectable 8.1%.  The BEA reported that transportation equipment turned up, but that other major categories of equipment output did not match their third-quarter gains.  The net contribution from the external sector to GDP growth dwindled from 0.80% in the third quarter to 0.19% in the fourth, as imports grew at a quicker pace than exports.

Fiscal deficit mushrooms in election-year budget
Despite the larger than expected slowdown in economic growth, the Consensus is increasingly optimistic about the growth prospects for this year.  The panellists surveyed added 0.3 percentage points to last month’s forecast, expecting the U.S. economy to expand 4.5%.  This year’s growth will be fuelled by a sizeable fiscal stimulus ahead of the November elections.  Moreover, the fiscal deficit, which together with the current account deficit constitutes the weak spot in the U.S. economy, will remain on the watch list of analysts.  The Bush administration just presented Congress with a US$ 2.4 trillion budget for the next fiscal year, which starts in October.  The budget represents a 3.5% increase over last year’s and implies a deficit of US$ 521 billion – the highest ever in absolute terms – or 4.5% of GDP.