Latin America in a Global Context - Economic Briefing August 2004

Strong Growth Seizes Virtually All Economic Regions (continued)

Optimism about Latin American growth prospects continues to increase
The Latin American growth prospects continue their slow but persistent rise.  The region is now expected to expand 4.3% this year, another notch above last month’s forecast and 0.6 percentage points above the pace expected at the beginning of the year.  This month’s upward revision was broad-based, as it was prompted by better projections for five of the seven major economies in the region: Brazil, Colombia, Mexico, Peru and Venezuela.  The outlook for Chile remained unchanged and the projection for Argentine economic growth dropped a notch over last month.  The downward revision to Argentina follows on continuous upward revisions in the past months.  While not yet worthy of concern, the downward adjustment reflects the potential detrimental effects of nationwide energy shortages on economic growth.  Furthermore, the government remains entrenched in discussions with the IMF about a number of issues.  As a result, the Fund has stalled the disbursement of funds, which could undermine the sustainability of the current economic recovery.

Rising optimism for Brazil and Colombia
Consensus Forecast panelists lifted the GDP growth forecast for Brazil by 0.2 percentage points over last month to the current 3.7%.  The upward revision follows on faster than anticipated growth in the second quarter, as the strong pickup in global demand is now being accompanied by a notable acceleration in the domestic economy.  However, inflation remains a concern and could prompt the Central Bank to tighten the reins.  Colombia only experienced a forecast hike of one tenth of a percentage point.  On the one hand, the economy is benefiting from resilient domestic demand and on the other hand, the pronounced currency appreciation observed this year could jeopardise the ability to fully take advantage of the current pickup in global demand. 

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 restored confidence that the country has been re-linked to the buoyant U.S. economy.  Moreover, higher oil prices are generating windfall profits and provide the public sector with extra spending power to boost economic activity.  Peru also benefits from higher commodity prices, which are contributing to the build up of the mining sector.  As a result, panellists have lifted the growth forecast by 0.2 percentage points over last month to 4.2%

Further upward revisions to Venezuela outlook amid buoyant oil 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 9.1% projected growth, up 0.8 percentage points from last month’s forecast, as the high oil price boosts the country’s all-important oil sector.  However, the impressive growth rate will be achieved on the back of a weak comparison base following a devastating recession last year. In addition,lingering political uncertainties – the referendum to recall President Chávez will be held next Sunday, 15 August – undermine a more robust development of the non-oil economy.