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Excessive
public sector deficits also haunting Europe
Exceeding fiscal deficits are also plaguing the Euro Area economies.
Both Germany and France will again violate the Stability and Growth
Pact, which imposes a limit on the public sector deficit of 3.0% of GDP.
The medium-term outlook also looks grim.
A recent report from the European Commission claimed that France,
which has exceeded the ceiling for the third consecutive year, risks
continuing to do so until 2007, two years beyond 2005, the year when
France pledged to comply with the target.
According to the Commission, the French government is relying on
overly optimistic forecasts for economic growth to justify its target of
bringing the deficit down to 2.9% of GDP in 2005.
In fact, France as well as other Euro Area states cannot hope to
bring their finances back on track with increased tax revenues in the wake
of higher economic growth.
According to the Consensus, economic growth will remain contained
at 1.8% in 2004, following on the very anaemic 0.5% growth in 2003.
Moreover, the medium-term outlook is not encouraging either, as the
market expects the Euro Area to grow just 2.2% in 2005.
Fiscal
discipline takes hold in Latin America
Surprisingly, Latin America posts the lowest fiscal deficit of the
major economic areas surveyed in the Consensus.
The region that has triggered a number of crises in the past due to
excessive public sector spending has now subsequently lowered the fiscal
deficits, as an increasing number of countries have adopted more prudent
fiscal policies.
According to the Consensus, the region will incur a deficit of 1.6%
of GDP on average, following on a 2.4% of GDP shortfall last year.
Moreover, the trend of tighter fiscal discipline is seen as
continuing into 2005, when Consensus Forecast panellists see a public
sector deficit of only 1.2% of GDP.
The beneficial consequences of fiscal discipline, such as low
interest rates and easier access to international capital, however, are
not translating into a substantially higher growth rate this year.
With regional growth at 3.7%, according to the Consensus, the
expansion remains behind the potential of a stronger cyclical rebound
following on two weak years of growth.
Venezuela
will rebound from two-year recession but political jitters continue to
undermine more pronounced recovery
Venezuela will lead regional growth with a 6.8% expansion.
While impressive at first view, the performance looks rather modest
when seen against the background of the double-digit recession that seized
the country in 2003.
In fact, the country will not even return to output levels seen in
the early 1990s.
Moreover, sentiment is beginning to deteriorate as the prospects
for a solution to the current political stalemate, which is at the root of
the economic doldrums, continue to dwindle.
In addition, the economy is battling severe restrictions on foreign
exchange imposed by the government and has by far the highest inflation in
the region.
Argentina
continues recovery and Chile profits from improved global setting
Argentina, on the other hand, is expected to continue its rebound from
the 2002 crisis. Following on 7.4% growth in 2003, the economy will
expand 5.4% this year, putting it in the second spot in terms of economic
growth. However, uncertainty over the government’s ability to
restructure its debt and doubtful willingness to progress on structural
reforms continues to overshadow growth prospects. Chile will also
grow above 4% this year. The improved global setting provides a
solid backdrop for higher economic growth for the region’s most open
economy. In addition, the country should benefit from higher
commodity prices, in particular copper, Chile’s main export product.
Finally, the country will also profit from more favourable financial
conditions, as the Central Bank has cut interest rates to historic lows.
As a result, the Consensus has hiked its GDP growth forecast 0.4
percentage points over the last two months to 4.7%.
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