Weaker global demand and prices for energy and commodities, as well as softer than expected domestic consumption have restricted the growth outlook for most economies in the Americas region during the first three months of the year. Fewer monthly job additions in the U.S. have dented consumer confidence, and growth for the current year is now forecast to be moderately lower than earlier expectations. Subdued consumer demand in the U.S. will likely restrict the pace of expansion in other regional economies such as Canada and Mexico, which count the U.S. as their major export market. However, aggressive reforms launched by the new government in Mexico have lifted investor optimism over the country’s long term growth potential.
The fall in global commodity prices has already started reflecting on the export performance of most countries in Latin America, and select governments are stepping up measures to prevent a further growth slowdown. In Brazil, where inflation risks have restricted monetary policy options, the government is increasing infrastructure spending and extending tax breaks. Other countries are expected to pursue even lower interest rates if the growth outlook worsens further.
United States: Labor market uncertainties cloud consumer sentiment and weakens growth outlook
After improving appreciably during the second half of last year and the first two months of this year, economic trends in the U.S. have turned softer at the beginning of spring. The initial reading of GDP growth for the first quarter was lower than expected at 2.5 percent as government spending saw a significant decline. Growth in consumer spending accelerated from the previous quarter, but detailed data showed that the gains came at the cost of a substantial fall in household savings. While the economy benefited from restocking by businesses, business investments in equipment and software were below forecasts. American businesses continued to see healthy export gains during the quarter, but higher growth in imports offset the gains. Nevertheless, revised data showed that the economy avoided a decline during the last quarter of 2012 as indicated by the earlier estimate.
Data from the labor markets show renewed uncertainties as the pace of job additions dropped in March and dragged down consumer sentiment. After adding an average of close to 200,000 jobs in January and February, the economy saw a net addition of only 88,000 jobs in March. Though the unemployment rate declined during the quarter, it was mostly due to people who have been unable to find jobs for several months dropping out of the active labor force. Weaker labor market trends reflected in the consumer sentiment surveys in March as the University of Michigan index slipped to its lowest in more than six months. This trend was confirmed by the retail sales data for March, which saw an expected decline after sustained expansion during the previous two months. However, lower gasoline prices and the wealth effect from higher equity market prices could support consumer sentiment in the coming months. Surveys of manufacturing activity also showed a decline in output growth, though the sector continues to expand.
Meanwhile, data from the housing market remained largely positive and the sector continues to be the biggest driver of economic growth. Average home prices are increasing at the fastest pace since the downturn, as lack of supplies and low inventories are forcing buyers across most cities to bid more aggressively. Mortgage rates remain at record lows, though credit standards continue to be significantly tighter than they were during the earlier boom. Sales of both new and existing homes trended higher during the quarter, when compared to the same period a year ago.
The relatively subdued economic trends have strengthened expectations that the Federal Reserve will sustain its aggressive monetary easing programs for a longer period. As the economy showed signs of improvement during the second half of last year, the possibility of the Fed gradually winding down its bond purchases during the second half of this year had increased. However, in the announcements after its recent meetings, the Fed reiterated the continuation of the current programs. The Fed is now purchasing treasury and mortgage backed securities totaling $85 billion a month.
Canada: Growth outlook remains muted, despite positive first quarter trends
Despite the recent weakness in the global demand outlook, trends from the Canadian economy were largely positive during the first quarter. Activity expanded more than expected during the first two months of the year, and it is now anticipated that aggregate growth for the first quarter was close to 2 percent annualized. This is an appreciable improvement from the last quarter of 2012, when the economy expanded just 0.6 percent. The mining sector saw a positive start to the year, growing more than 6 percent in February as output of potash increased. The manufacturing sector expanded at a more moderate pace of 0.6 percent in January and 0.8 percent in February. However, following the decline in energy and commodity prices in March, the Bank of Canada has lowered its first quarter GDP growth forecast to 1.5 percent from 2.3 percent earlier. For the full year 2013, the central bank and the IMF expect the Canadian economy to expand 1.5 percent, one of the slowest among major economies outside Europe.
Domestic consumption trends have also been more robust than expected as retail sales swelled in January and February, after a decline in December. However, weaker sales of furniture and home furnishings suggest that the housing sector continues to slow. Sales of existing homes slumped 15 percent in March while the average gain in home prices moderated to 3 percent from a year ago. Nevertheless, the declines in energy and commodity prices have not yet started restricting exports, which gained over 5 percent in March, both in terms of volume and value. The value of imports increased at a slower 1.7 percent, allowing Canada to post the first monthly trade surplus in nearly a year. Exports are a major component of Canada’s economy, accounting for a third of aggregate output, with close to 75 percent of export shipments destined for the U.S.
Meanwhile, the Bank of Canada continues to maintain its benchmark rate unchanged at 1 percent as growth signals remain subdued and inflation risks are well contained. Consumer inflation slipped again in March to 1 percent, the lower end of the central bank’s target range. The central bank now expects inflation to remain below 2 percent for the next two years, and indicated that rate increases would be considered only if annual economic growth accelerates above 2 percent.
Brazil: Inflation risks worsen the economic outlook even as domestic consumption slows
Brazil’s economic outlook has become uncertain yet again, after showing signs of moderate improvement during the last quarter of 2012. The weaker global demand and lower commodity prices have restricted exports, which declined nearly 14 percent in February. As imports continued to expand, the country’s current account deficit for February widened more than expected. Domestic consumption is also showing signs of leveling off as retail sales unexpectedly fell in February, after expanding during the previous month. Sales of consumer durables declined in February, for the first time in nearly four years. The International Monetary Fund lowered its forecast for Brazil’s GDP growth this year to 3 percent, from 3.5 percent earlier. The economy expanded less than 1 percent in 2012, the slowest pace among the large emerging countries.
To support growth, the Brazilian government is promoting an aggressive infrastructure investment plan totaling $235 billion over the next several years. The government is also speeding up some of the infrastructure upgrades planned for the Summer Olympics in 2016 and the Soccer World Cup next year. In addition, proposals have also been made to privatize some of the country’s seaports to make them more efficient. To boost consumption, payroll tax cuts have been extended to cover more industries and select federal taxes on consumer staples have been eliminated. The government also indicated that some of the fiscal rules will be eased to allow both the federal and state governments to expand their spending. Brazilian companies are raising capital from the international markets through initial public offerings. Foreign direct investment flows during the first two months of the year have sustained the pace from last year, when such inflows reached a record high.
Still, resurgent inflation risks have made the Brazilian central bank more guarded about its monetary policy outlook. Consumer inflation accelerated in February and March, when it overshot the central bank’s upper target. The bank recently ended its rate easing cycle that ran for nearly three years and raised its benchmark rate by 25 basis points. Economists surveyed by the central bank now expect the benchmark rate to be increased by another 75 basis points before the year end.
Mexico: Benchmark rate cut unexpectedly as growth signals moderate
Reform initiatives by President Pena Nieto dominated news from Mexico during the first quarter, helping to enhance the positive sentiment over the country’s economic prospects. The new government that came to power in December last year has announced its intention to open up key sectors of the economy such as telecommunications and energy to more competition. It is expected that the efficiency gains could lead to lower prices and benefit consumers. To expand the gains achieved from trade pacts such as NAFTA, Mexico is now supporting a trade deal between NAFTA countries and the European Union. Mexico already has a trade deal with the EU, signed more than a decade earlier.
However, economic trends have become relatively softer during the first quarter as domestic consumption growth has moderated, though U.S. demand has held steady so far. Growth in industrial output has been uneven in recent months, recovering in January from a slump at the end of last year, only to weaken again in February. Retail sales slipped 2.6 percent in February from a year earlier. On the positive side, exports rose during February and March on increased U.S. demand for automobiles and other manufactured goods. Nonetheless, the recent decline in U.S. consumer sentiment and the appreciation of the Mexican peso this year have restricted the export outlook.
The Mexican central bank unexpectedly cut its benchmark rate by 50 basis points in March, after holding the rate unchanged for more than three years. However, expectations of further rate decreases have been tempered by higher inflation, which remains above the central bank’s target. Economic growth is anticipated to moderate from last year’s 3.9 percent expansion, and economists surveyed by the central bank now expect the benchmark rate to remain at the current level until early 2015. Meanwhile, rating agencies Standard and Poor’s and Fitch have lifted the outlook for the country’s credit rating to positive. The agencies, which had downgraded Mexico last year, cited the prospect of improved economic growth if the reforms proposed by the government are successfully implemented.
Chile: Fall in copper prices hurts economic outlook
The decline in international copper prices this year on weakening global demand has clouded the economic outlook for Chile, the world’s largest exporter of the metal. Demand outlook for industrial commodities has turned softer as global economic trends have become more subdued, especially for large buyers of industrial materials such as China. In addition to the price drop, Chile’s copper exports in recent months have also been hurt by worker strikes in the country’s major seaports. Current copper prices are close to the average price estimate used by the Chilean government to forecast budget revenues. If prices decline further, it could upset the budget balance and reverse the fiscal surplus reported for the first quarter. Tax revenues from copper mining and exports account for nearly 20 percent of aggregate budget revenues, and nearly 15 percent of total GDP.
Nevertheless, mining activity continued to expand during the first quarter, helping aggregate industrial output grow 3.3 percent during the first quarter. Production by the mining sector increased 6 percent during the quarter from a year ago, and compensated for the subdued 0.5 percent growth in manufactured goods. Consumer spending remains healthy and continues to support aggregate economic growth. Retail sales increased more than 10 percent in March, when compared to the previous year, following a 7 percent rise in February. However, if commodity and farm exports continue to be disrupted by the agitation at the country’s ports, the decline in incomes could restrict domestic consumption in the coming months.
Despite the weaker export outlook, Chile’s central bank continues to hold its benchmark rate steady, one of the highest in the region after adjusting for inflation. Economists surveyed by the central bank expect inflation to increase later this year to nearly 3 percent, but will remain well below the bank’s upper target of 4 percent. The central bank acknowledged that the economy has slowed and credit supply has become more restrictive. The Chilean peso has corrected this year, in line with the decline in copper prices, providing some help to exporters.
Peru: Healthy domestic growth offsets subdued external demand
Relatively healthy domestic consumption, helped by higher investments in housing and infrastructure, continues to largely shield the Peruvian economy from subdued global demand for commodities. The economy expanded 5.9 percent on an annualized basis during the last three months of 2012, and 6.3 percent for the whole of last year. Though the pace of growth moderated from the previous quarter, it was slightly above expectations. The country’s central bank and the IMF currently expect the economy to maintain the same pace of 6.3 percent this year as well, though the recent fall in prices of copper and silver could restrict export revenues. Exports declined more than 20 percent in February and dragged down economic activity growth for the month to 5 percent, from 6.2 percent in January.
Though slower external demand has increased expectations of interest rate cuts, the central bank has held its benchmark rate steady for nearly two years now. Countering the export weakness, growth in domestic credit demand remains above 15 percent, suggesting sustained expansion in domestic consumption. Inflation accelerated during the month of March, though the rate was still within the central bank’s upper target. With energy and other commodity prices easing off, economists surveyed by the central bank do not anticipate inflation risks to worsen this year.
Concerns about currency appreciation, one of the biggest risks facing the Peruvian economy over the last year, have abated somewhat after the sol weakened against the U.S. dollar during the first quarter. The drop in global commodity prices was the main trigger for the currency decline, while the aggressive dollar buying by the Peruvian central bank played a smaller part. Other recent steps to weaken the currency included successive increases in the U.S. dollar reserve requirements for banks and allowing pension funds to increase overseas investments. The currency had appreciated nearly 6 percent in 2012 as investment inflows to the country exceeded $12 billion.
Colombia: Subdued economic trends trigger larger than expected rate cut
The Colombian economy slowed down during the second half of last year and trends from the first quarter of 2013 indicate that the pace of growth remains subdued. GDP growth for the last quarter of 2012 at 3.1 percent annualized was an improvement from the previous quarter, but lower than most other countries in the region. Domestic demand growth has slowed and the continuing fall in international prices of oil and other industrial commodities has weakened the outlook for exports. Lower than expected inflation in recent months and relatively weak industrial output during January encouraged the central bank to cut its benchmark rate by 50 basis points in March.
To help revive economic growth, the Colombian government has announced additional infrastructure investments and fiscal incentives worth nearly $2.75 billion. As part of the measures, the government will speed up infrastructure projects and a program to help low income families build homes will be expanded. In addition, mortgage rates on homes for low income groups will be cut by five percentage points, the cost to be shared equally by the government and the banks. The plan also includes measures to lower import duties and other taxes, as well as investments to make ports more efficient.
The Colombian government and the central bank remain concerned about currency appreciation that has hurt the country’s exports over the last year, and has pushed up costs for domestic manufacturers. Though the currency has weakened during the first quarter of this year, the government believes that it is still overvalued, especially when global commodity prices have corrected. To prevent the currency from strengthening, the Colombian government said it will allow the country’s pension funds to invest more of their assets abroad. Meanwhile, the central bank continues to buy dollars from the local currency market at the rate of $30 million a day.
Argentina: Increased probability of debt default adds to country’s woes
Argentina faces the daunting prospect of a sovereign debt default that will worsen the economic slowdown the country is facing. Argentinadefaulted on its sovereign debt in 2001and, several years later, offered the affected bondholders new bonds that were only a fraction of the value of the defaulted bonds. More than 90 percent of investors accepted the offer, but a U.S. Federal Appeals Court is set to decide on a suit by the remaining bondholders who demand that Argentina should pay them back in full. If the court decides in their favor, and Argentina refuses to pay, it could be treated as a technical default and holders of other Argentinean bonds worth more than $40 billion could demand immediate repayment. Given the level of resources currently available, it will be almost impossible for Argentina to meet this demand. Rating agency Moody’s has lowered Argentina’s credit rating below investment grade, citing the increased probability that the country will default.
Meanwhile, the economic environment for Argentina remains fragile as both external and domestic demand remains subdued. The country’s economic growth slumped to 1.9 percent last year as industrial output declined and adverse weather conditions limited farm output. During the last quarter of 2012, the economy expanded 2.1 percent annualized from a year ago. The pace of growth is significantly lower than the nearly 8 percent annual growth achieved during the period 2003 to 2011. Capital outflows from Argentina slowed significantly in 2012 to $3.4 billion, from $21.5 billion the previous year, after the government imposed stringent controls. Economic trends during the first quarter of 2013 also remained weak as consumer confidence continues to decline. Earlier this year, Argentina became the first country to be censured by the IMF for not providing accurate economic statistics.
FORWARD LOOKING STATEMENTS
Certain statements made in this article may be forward looking. Actual future results or occurrences may differ significantly from those anticipated in any forward looking statements due to numerous factors. Thomas White International, Ltd. undertakes no responsibility to update publicly or revise any forward looking statements.
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