Latin America in a Global Context - Economic Briefing July 2004

Optimism Seizes Virtually All Economic Regions  (continued)

Outlook for Japan continues to improve rapidly
A host of good news fuels optimism that the Japanese economy is finally leaving behind a decade of sluggish growth.  In the first quarter, GDP grew 1.5% over the previous quarter, up from the previous estimate of 1.4%.  Moreover, while so far the rebound had been export-driven, depending on upturns in the United States and the rest of Asia, the recovery is now spreading to the domestic economy.  In May, consumer outlays continued to grow, with spending by wage earning households up 5.6% over the same month a year earlier.  Consumer spending is also benefiting from improving employment conditions.  In May, Japan's unemployment rate edged down to 4.6% from 4.7% in April to its lowest level in almost four years.  Moreover, the jobless population declined 560,000 over the same month last year to 3.2 million, which represented the biggest single-month decline since the government began keeping records in 1950s.  Finally, the Bank of Japan's Tankan survey showed business sentiment had risen to its highest level in over a decade.  The surprisingly positive reading reflected buoyant exports, an acceleration of domestic demand and a large increase in corporate profits. The improvements also prompted monetary authorities to give their most upbeat economic assessment since the beginning of the recession.  Central Bank officials claimed that the Japanese economy is finally reaching the end of the long and painful path of post-bubble adjustment and is gradually gaining momentum for the restoration of a sustained growth.  These positive developments have prompted Consensus Forecast panellists to again revise their GDP forecasts for this year upwards to 4.2% from 3.6% expected last month.  Nevertheless, even despite the pickup in domestic demand, Japan remains haunted by deflation that has persisted for five years.  In May and June, Japanese consumer prices fell slightly more than expected and while forecasts are improving, the Consensus Forecast has prices declining by 0.1% this year.

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 4.2% this year, another notch above last month’s forecast and half a percentage point above the pace expected at the beginning of the year.  This month’s upward revision was prompted by better projections for Argentina, Mexico, Peru and Venezuela, contrasted by a small downward revision to the Colombian GDP forecast. 

Argentina and Venezuela continue trend of upward revisions
The Consensus for Argentine GDP growth in 2004 moved from 7.0% expected last month to the current 7.1%, 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.  The strongest upward revision this month was once again 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 8.3% projected growth, up 0.3 percentage points from last month’s forecast.  However, the impressive growth rate will be achieved on the back of a weak comparison base following a devastating recession last year.

Mexico seen more optimistically amid resurfacing link to the U.S. economy
The outlook for Mexican GDP growth in 2004 was lifted by 0.2 percentage points from 3.5% expected last month to the current 3.7%, following on a 0.3 percentage point upgrade in June.  The improved sentiment reflects better-than-expected first quarter data, which seem to have carried over into the second quarter.  Moreover, the link to the buoyant U.S. economy is resurfacing and is seizing the Mexican manufacturing sector from the protracted slump observed through the beginning of this year.