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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.
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