Latin America in a Global Context - Economic Briefing June 2004

Global Outlook Rising Again amid Improved Prospects for Japan (continued)

Increased optimism about Latin American growth prospects
The Latin American growth prospects continue their slow but persistent rise.  The region is now expected to expand 4.1% this year, another notch above last month’s forecast and 0.4 percentage points above the pace expected at the beginning of the year.  This month’s upward revision was prompted by better projections for Argentina, Chile, Mexico and Venezuela, contrasted by a downward revision to the Brazilian GDP forecast. 

Argentina, Chile and Venezuela continue trend of upward revisions
The Consensus for Argentine GDP growth in 2004 moved from 6.8% expected last month to the current 7.0%, 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 threaten to choke off growth in the energy-hungry industrial sector.  In Chile, another small upward revision lifted the 2004 GDP growth forecast to 4.9%.  The increase was mostly motivated by the very robust external sector, which is benefiting from mushrooming demand and higher copper prices.  The strongest upward revision this month was applied to the Venezuelan growth outlook.  The economy is profiting from a strong cyclical rebound, which puts the country at the helm of the region with 8.0% projected growth, up 0.7 percentage points from last month’s forecast.  However, the impressive growth rate is achieved on the back of a weak comparison base following a devastating recession last year.

Mexico seen more optimistically amid better than expected first quarter
While the upward revisions for Argentina, Chile and Venezuela continue a trend of increased optimism observed in the past months, the upward revision to Mexico puts an end to a trend of worse or stagnating projections.  The outlook was lifted by 0.3 percentage points from 3.2% expected last month to the current 3.5%.  The improved sentiment is due to better-than-expected first quarter data, which seems to be carrying over into the second quarter.  Moreover, consumer sentiment is also improving, which could put the Mexican recovery on a more solid footing.

Brazil revised downward amid volatility in financial sector
The Brazilian economy has clearly exited recession but recent financial market volatility has exerted significant pressure on the currency.  Concerns are mounting that persistent exchange rate volatility combined with the possibility of higher oil prices could raise inflation.  As a result, the Central Bank may be required to abstain from further monetary easing for the time being and activity could moderate.  As a result, Consensus Forecast participants have revised this year’s outlook from 3.6% last month to 3.5% - the first downward revision since January 2003.