Latin America in a Global Context - Economic Briefing October 2004

Global Economy Remains on Track for Rock-Solid Growth (continued)

Much better outlook for Japan
The single most important upgrade to an economic forecast since the April WEO was applied to Japan.  The Fund added more than a full percentage point to its previous 3.3% forecast for 2004 GDP growth to 4.4% and is thus 0.2 percentage points more optimistic than the Consensus, which sliced off a 0.1 percentage point since last month, amid some disappointing data releases.  In the first quarter, the recovery has been driven by exports, particularly to Asia, and by a rebound in private investment.  In the second quarter, growth disappointed owing to a sharp drop in inventories and a surprisingly large decline in public and private sector investment.  While the IMF expects private domestic and external demand to remain robust for the remainder of the year, growth is anticipated to drop to 2.3% in 2005, with downside risks resulting from higher oil prices, a slowdown in export growth, a potential hard landing in China, higher long-term U.S. rates or a renewed yen appreciation.  The IMF projects that deflationary pressures will continue to ease amid the gradual reduction in economic slack.  Nevertheless, officials see headline consumer price variation to remain in negative territory in 2005, whereas the Consensus expects deflation finally coming to an end with a 0.1% price increase next year. 

IMF and Consensus see sound recovery in Latin America
For Latin America, the IMF mostly shares the upbeat assessment of the LatinFocus Consensus Forecast.  The Fund sees growth rebounding strongly this year, supported by a pickup in domestic demand amid loose monetary conditions in most countries and the robust global expansion, reinforced by the rising share of trade in GDP.  Higher oil prices are benefiting major oil exporters, such as Colombia, Ecuador, Mexico and Venezuela, but hurting oil importers, such as Chile and Uruguay.  All countries are benefiting from the rise in non-fuel commodity prices, as the improved terms of trade generate to trade gains in exporters of metals (Chile and Peru) and agricultural products (Argentina, Bolivia, Brazil, Ecuador and Paraguay).  With its 4.6% economic growth projection for 2004, the IMF sees the Western Hemisphere (which is not identical to Latin America since it also includes Caribbean economies) a notch more pessimistically than the Consensus that has the region growing at 4.9% this year.  Next year, the IMF anticipates 3.6% growth versus 3.7% expected by the Consensus.  In the main economies, the Fund’s assessment is broadly in line with the Consensus with the exception of Brazil and Peru. 

IMF more pessimistic about Brazil than market …
In Brazil, the WEO sees economic growth 0.3 percentage points below the Consensus of 4.0% for this year and bang in line with the 3.5% market estimate for 2005.  The Fund acknowledges that Brazil has taken important steps to boost resilience, including increasing international reserves, reducing the share of foreign exchange-linked public debt and improving banks’ net foreign exchange position.  IMF officials laud the expenditure restraint by the federal government and welcome the announcement of an inflation target of 4.5% and the narrowing of the band for 2006.  However, the Fund demands that structural reforms be extended and deepened to include increased labour market flexibility, judicial and regulatory reform, improved business conditions, reforms of state-level taxes and de-earmarking federal taxes. 

… but more optimistic about Peru
For Peru, the WEO is more optimistic than the Consensus, expecting the economy to expand by 4.5% versus the 4.2% projected by the Consensus.  The difference is even more pronounced next year, when the Fund anticipates the economy to expand by 4.5%, whereas the market expects an expansion of 4.0%.  Even though the IMF objects to the high public debt and demands further fiscal consolidation, the Fund sees that growth continues to be solid and inflation moderately low.