Latin America in a Global Context - Economic Briefing September 2004

Broad-based Growth Around the Globe

The global economy remains poised for robust growth this year, following on two years of anaemic growth.  Moreover, the prospects for next year are also positive.  All regions are recovering, with the upturn being most pronounced in emerging Asia, particularly China.  Among the industrial countries, Japan is now projected to grow at the same pace as the United States, following on continuous upgrades to the Japan outlook in the past months and a downgrade to the U.S. outlook this month.  Higher oil prices are also beginning to cast a shadow over each country’s outlook.  While the two economies lead growth, higher energy prices are casting a shadow over their short term outlook.  In addition, both economies remain hampered with fundamental imbalances.  The United States economy is burdened with sizeable deficits in the current account and public sector balances, which could trigger a sudden adjustment in the foreign exchanging markets.  In Japan, misalignments in the financial sector persist and the country remains mired in deflation.  The prospects for the major European economies, on the other hand, remain sombre.  The Euro Area will recover from last year’s slump but economic growth will remain moderate, as the increased optimism observed in other regions is only gradually applied to Europe.  Finally, Latin America is seen increasingly optimistic, as increased global demand and higher commodity prices are rekindling domestic demand.

U.S. second quarter growth revised downwards
According to preliminary estimates released by the Bureau of Economic Analysis (BEA) on 27 August, gross domestic product (GDP) increased at an annual rate of 2.8% in the second quarter of 2004.  The actual reading was 0.2 percentage points below the advance estimates released last month.  In the first quarter, GDP increased 4.5%.  The revision primarily reflected a downward revision to exports and an upward adjustment to imports that were partly offset by higher than reported consumption, higher inventories and equipment and software.  

Consumption slows markedly in second quarter
Despite the strong upward revision (plus 0.6 percentage points) to personal consumption expenditures, total consumption marked the dark spot in the second quarter, growing by only 1.6% over the same period last year.  In particular, durable consumer goods slumped, albeit not as strongly as indicated by the advance estimates.  In the second quarter, durable consumer goods were flat compared to 2.2% growth in the first quarter.  However, growth dropped on the back of the very robust expansion observed in the same period last year, when durable consumer goods swelled by 20.6%.  The slowdown in durable goods was thus to be expected.  In the second quarter, non-durable consumer goods consumption expanded just 0.4% over the same period last year, following on 6.7% growth in the first quarter. 

Higher energy prices continue to overshadow outlook
Consumption will be fundamental to underpin the current business cycle of the U.S. economy and analysts seem divided whether the second quarter slump only represented a soft patch or if it augurs a further weakening in the months ahead.  On balance, the Consensus Forecast participants have become more cautious and have lowered their forecasts for full year economic growth by 0.2 percentage points over last month to 4.3%.  In particular, the uncertainty about oil prices continues to cloud the economic outlook, as persistently higher energy prices could cap real growth in personal incomes and thus dampen consumption.

Oil price rises again in early September
The majority of forecasts are based on expectations that the oil price will drop below US$ 40 per barrel by the end of the year.  However, at the end of August, the price for West Texas Intermediate (WTI) remained above that threshold even though it declined to US$ 42.1 (after having an all-time high of US$ 48.7 per barrel on 19 August) from US$ 43.8 at the end of July.  The decline followed an increase in supply from the Organization of Petroleum Exporting Countries (OPEC) by 1.5 million barrels per day (bpd) over the last four months with top producer Saudi Arabia pushing production to around 9.5 million bpd in August, up more than one million bpd from April.  But a report by the U.S. Energy Information Administration (EIA), shows that commercial crude oil stocks were down more than 6% in the last two months to the lowest level since March, and fears that a hurricane may strike the Gulf of Mexico prompted another surge in oil prices to US$ 44.8 per barrel on 10 September. 

Recent indicators provide ambiguous picture
More recent economic indicators provide an ambiguous picture of the current state of the U.S. economy.  Even though retail sales and housing starts rebounded in July, growth was on the back of a weak June reading.  Moreover, anecdotal evidence suggests that back-to-school sales in August were disappointing and that motor vehicle sales were softer than expected.  In addition, consumer confidence fell slightly in August due to greater concerns about the sluggish pace of growth in employment.  The index of consumer sentiment of the University of Michigan was 95.9 in the August 2004 survey, down from 96.7 in July.  Owing to the dismal payroll report in early August, consumers have shifted their perceptions from a positive to a negative view of changes in employment.  However, while consumers lowered their expectations for economic growth in the year ahead, the outlook for long-term economic prospects was maintained, suggesting that consumers see the current job scarcity as only transitory.