Latin America in a Global Context - Economic Briefing June 2008

Outlook Solid Despite Global Slowdown

The global outlook remains subdued, despite the fact that major economic areas have been holding up surprisingly well so far this year. First quarter growth in the United States was revised slightly upwards, but the economy is likely to remain weak in the second quarter in spite of the fiscal stimulus package. In the Euro Area, the economy grew quicker than expected, as Germany expanded at the strongest pace in 12 years. Japan's economy also grew at a faster clip than anticipated in the first quarter, with exports to Asia and other emerging markets compensating for weaker U.S. demand. However, the outlook for the United States remains cloudy. The housing market has not yet bottomed out and persistently falling real estate prices promise to further gnaw at consumer confidence, which has already hit the lowest level in 28 years in May. Moreover, the impact of additional spending power will be short-lived as tax rebates draw to an end. Consequently, the outlook for the U.S. remains subdued well into 2009. The European economies also seem to be headed for a slowdown, as tight credit conditions are weighing on consumption. In addition, increasing oil and food prices continue to fuel inflation, which could prompt the European Central Bank to raise interest rates in July. In Japan, household confidence dropped to a five-year low in April while inflation accelerated to the fastest pace in a decade. Against this backdrop, although the Latin American region is likely to grow at the slowest pace in three years, prospects for economic growth remain stable, as the area continues to benefit from robust domestic demand and high commodity prices. Regional inflation, however, is likely to reach the highest level in six years, as increasing oil and food prices continue to exert pressures on consumer prices.

Stable outlook for major economies anchors regional estimate

Consensus Forecast panellists have left their 2008 output growth forecast for Latin America unchanged at 4.5% for the seventh consecutive month.  An upward revision to one of the seven major economies (Peru) compensated for downward revisions to two countries (Chile and Venezuela).  Consensus Forecast panellists maintained forecasts unchanged for the remaining four major economies (Argentina, Brazil, Colombia and Mexico).  Peru experienced the only upward revision, as panellists raised their GDP growth forecast by 0.3 percentage points over last month to 7.6%.  The Peruvian growth outlook continues to improve, as resilient domestic demand, investment in particular, will spur economic activity this year.  Therefore, the country maintains its position as the fastest growing economy in the region for the second consecutive year.  On the downside, Venezuela experienced a substantial cut to its economic growth forecast.  Consensus Forecast participants pared their projection for GDP growth by 0.4 percentage points to the current 5.8%.  The revision follows on disappointing growth figures for the first quarter.  Moreover, the Chávez administration’s failure to make the investments in the oil sector necessary to increase or even maintain the current oil output levels is undermining the country’s wealth foundation.  Next to Venezuela, Chile experienced a downward revision of 0.1 percentage points to its growth projection.  Panellists cut the growth forecast for this economy from the 4.2% expected last month to the current 4.1%.  This month’s projection is more than a full percentage point below the 5.2% expansion expected by Consensus Forecast panellists only seven months ago.  Prospects for this year are deteriorating, as export growth is likely to slow notably amid moderating global demand and a strong peso.  In addition, high interest rates will continue to curb the pace of domestic demand.

Inflation expectations jump to highest level in six years

According to this month’s poll, average regional inflation will reach 7.1% by the end of the year, which is up 0.4 percentage points from last month’s projection and would represent the highest rate observed in six years.  This month, Consensus Forecast panellists raised their inflation forecasts for five of the seven major economies in the region (Brazil, Colombia, Mexico, Peru and Venezuela).  Only Argentina experienced a downward revision, while the inflation forecast for Chile remained unchanged.  Inflation expectations are rising across the entire region, as higher food and oil prices continue to exert strong pressures on consumer prices across all countries.  Brazil, the biggest Latin American economy, experienced the strongest upward revision to its inflation forecast, as panellists lifted their estimates by 0.5 percentage points from 4.7% expected last month to the current 5.2%.  Panellists revised their projections for Brazil upwards despite the fact that the Central Bank recently raised interest rates for the second time within two months, showing its commitment to achieve its 4.5% inflation target for the year.  Following Brazil, Consensus Forecast panellists lifted the inflation outlook for Mexico, the second-biggest economy in the region, by 0.3 percentage points, from 3.9% expected last month to the current 4.2%.  The revision reflects a sharp rise in inflation in the last months amid soaring food prices.  For the time being, Mexico’s Central Bank has left interest rates unchanged, but recently warned that rising price pressures are a cause for concern.  Next to Mexico, Colombia experienced an upward revision of 0.3 percentage points to its inflation forecast as well.  Panellists raised their estimates from the 5.1% expected last month to the current 5.4%.  In May, Colombia’s inflation rebounded strongly and reached the highest level in four years.  Finally, Peru and Venezuela experienced upward revisions of 0.1 percentage points to their inflation forecasts.  Despite the moderate upward revision to its inflation outlook, Venezuela carries the red lantern this year, with a projected year-end inflation rate of 27.9%.  Apparently, the attempts of the Chávez administration to control price levels backfire as consumer prices shoot up amid persistent supply constraints.