Latin America in a Global Context - Economic Briefing April 2004

Increasing Optimism about Global Rebound Drawing to an End

The series of upward revisions to the global growth outlook amid increasing optimism for the U.S and Japanese economy is drawing to an end.  That said, the global economy remains poised for robust growth this year, following on two years of anaemic growth.  The sentiment for the Japanese economy continues to increase after the government had published better than expected data for 2003, sparking optimism that Japan may rebound from years of sluggishness.  The output growth forecast for the U.S. economy dropped a notch but remains at a very strong level.  The positive picture is only marred by sizeable deficits in the U.S. current and fiscal accounts.  The outlook for the major European economies, on the other hand, remains sombre.  The Euro Area will recover from last year’s sluggishness but economic growth remains moderate and the optimism is waning again.  Finally, Latin America is regarded more optimistically, as the recovery story in Argentina and Venezuela takes a firmer grip than anticipated earlier. 

String of upgrades to U.S. growth draws to an end
The wave of optimism that took the forecast for this year’s economic growth from 3.3% in September last year to 4.6% last month has finally drawn to an end.  This month, the Consensus Forecast panel has sliced a tiny fraction off of the 2004 GDP forecast, just sufficient to lower the average by a 0.1 percentage point to 4.5%.  Naturally, the trend to an ever higher forecast had to abate at some point and a drop of 0.1 percentage point is not dramatic.  However, the revision also reflects a slight deterioration in the underlying fundamentals of the U.S. economy.  With an average price of US$ 36.7 per barrel for West Texas Intermediate (WTI) crude oil basket in the first quarter, the oil price has reached the highest level since 1982, bad news for the world’s largest energy consumer.  Furthermore, the most recent developments in Iraq have raised the probability of heightened instability in the region and have lowered the probability that the oil price will drop significantly in the near future.  Finally, the rising death toll for the U.S.-led coalition forces is likely to undermine consumer confidence. 

Consumer confidence buttressed by personal finances
The latest index of consumer sentiment from the University of Michigan, published on 26 March, does not yet reflect the potential impact of the sudden increase of casualties in Iraq on American consumer confidence.  In fact, the survey shows an increase in consumer confidence in March, as consumers anticipated more favourable prospects for their personal finances.  However, consumers remain concerned about slower job growth and higher gas prices.  The Michigan poll implies that consumers anticipate the economic growth to slow during the year and expect continued weakness in employment growth.  Moreover, the most recent survey found the lowest level of confidence in the government’s economic policies since President Bush was elected. 

Consumer confidence drops amid concerns about increased violence in Iraq
A more recent gauge of consumer confidence, published on 9 April, which already contains reactions to the increased instability in Iraq, dropped significantly.  The AP-Ipsos consumer confidence index dropped from a reading of 97.7 in early March to 84.8 in early April, the lowest level since early October last year.  According to the survey, the decline reflects concerns about the surge in violence in Iraq and rising energy prices.  However, despite the recent weakness in consumer attitudes, consumer spending should continue at a vibrant pace, as tax refunds and lower borrowing costs should sustain consumer spending in the first half of the year.  Moreover, the job market is showing signs of improvement.  In March, non-farm payrolls climbed 308,000, helped by a bounce-back in construction employment on improved weather conditions.  The gain was the biggest since April 2000 and almost triple the 120,000 figure expected the market.  However, simultaneously, the unemployment rate edged up to 5.7% from 5.6% in February, as the number of people searching for work also rose.