Latin America in a Global Context - Economic Briefing April 2004

Increasing Optimism about Global Rebound Drawing to an End (continued)

Deficit in current account and public sector remain persistent
Despite the robust growth expected for 2004, the U.S. economy continues to raise concerns, as the twin deficits in the fiscal and current account constitute a sizeable share of GDP.  Moreover, the forecasts for the deficits are rising.  Consensus Forecast panellists raised their projection for the public sector deficit in 2004 from 4.2% of GDP expected last month to 4.3% of GDP.  Even though both presidential candidates pledge to lower the deficit, the recovery of fiscal stability will be a long process. Nevertheless, the surveyed economists see the deficit dropping moderately to 3.6% in 2005.  Similarly, the expectation of this year’s current account deficit was raised a notch from last month’s 4.9% of GDP forecast to 5.0%.  In addition, despite the weakening of the US$ in currency markets, the current account deficit seems to be even more persistent than the fiscal shortfall. According to this month’s estimate, the current account deficit will only drop to 4.6% in 2005. 

Sentiment for the Euro Area economy deteriorates
The Consensus panel is a notch more pessimistic about the prospects for the Euro Area than last month.. The average forecast for economic growth this year in the Euro Area dropped from 1.8% expected last month to 1.7%.  Nevertheless the growth rate represents a notable improvement over last year.  After bottoming out in the first half of 2003, the Euro Area economy turned around in the second half of the year but full year growth nevertheless reached just 0.4% in 2003.  A recent report from the European Commission expects the recovery observed in the second half last year to gather momentum this year, amid resilient global growth and a rebound of business and consumer confidence.  In addition, the Commission sees growth propelled by accommodative macroeconomic policy conditions, lower inflation, supportive financial conditions and progress in structural reforms.  As a result, investment expenditure should rise notably.  The Commission also expects private consumption to rise, albeit at a more moderate pace.  The Commission’s current growth forecast for 2004 is exactly in line with the Consensus Forecast.  However, with a 2.4% GDP growth forecast for 2005, the Commission is a bit more optimistic than the Consensus, which sees economic growth at only 2.1%. 

Latin American outlook improves as rebound stories in Argentina and Venezuela continue
The sentiment for economic growth in the Latin American region continues to improve.  Following on two consecutive months of upward revisions, the Consensus for output growth this year inched up another 0.1 percentage point to the current 4.0%.  Unlike last month’s upgrade, however, that seized virtually all of the surveyed economies, this month’s upgrade hinges entirely on increased optimism about Argentina and Venezuela.   

But pre-crisis levels still far in both economies
Argentina once again leads the pack.  The Consensus for GDP growth in 2004 moved from 5.8% expected last month to the current 6.5%, as the cyclical rebound from four recessionary years is more pronounced than expected earlier.  The upward revision comes in spite of nationwide energy shortages that could force the government to implement energy rationing.  A similar decision in Brazil three years ago slowed down the country’s manufacturing industry and forced the economy into recession.  Cyclical rebound is also the key word in Venezuela, where the Consensus Forecast increased by 0.4 percentage points over last month to 7.4%, which puts the country at the helm of the region.  However, the impressive growth rates in both countries are achieved on the back of a weak comparison base following devastating recessions. Despite impressive growth, neither country will reach pre-crisis levels.