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Outlook for global economy improves
as increased optimism for healthier growth in the US compensates for
gloomier picture in Japan and unchanged sentiment for Europe
The outlook for global economic growth this year was hiked by 0.1
percentage points to 1.4% from 1.3% anticipated in last month’s poll. The
upward movement is entirely due to a large swing in sentiment over the US
economy, where a spate of data releases has persistently surprised on the
upside, prompting most analysts to revise their forecasts upward. The
contrast to the Japanese economy could hardly be more pronounced. Just as
the Consensus is becoming more optimistic about the US, faith in the
ability of the Japanese government to provide for the necessary framework
to pull the economy from recession is waning. The outlook for the
European economy remained unchanged, despite encouraging signs that the
Euro Area will follow the US economy on the heels on its way to recovery.
The improved global outlook has not yet fed through to increased optimism
for Latin America, as further downward revisions to Argentine and
Venezuelan economic growth this year offset the positive impact of a
quicker than expected US recovery on Mexico.
Recession? What Recession?
Economic data for the fourth quarter last year have been revised upward
from the latest estimate of 1.1% to 1.4% growth. Initially, most analysts
had expected the economy to contract and were even surprised by the first
government estimate, which indicated economic growth of 0.2%. While the
revision is not spectacular, it nevertheless confirms the impression that
the economy has weathered the possible confidence shock expected to hit
the United States in the wake of the 11 September attacks better than
expected by most observers. The surprisingly resilient state of the
economy even prompted U.S. Treasury Secretary Paul O’Neill to claim that
the US economy never even entered a recession. Indeed, popular definition
of recession demands at least two quarters of declining output, which so
far has not come to happen and according to remarks from Federal Reserve
Board's Chairman Alan Greenspan before the Senate on 7 March, “recent
evidence increasingly suggests that an economic expansion is already well
under way”. O’Neill’s statement contradicted the declaration of the
National Bureau of Economic Research (NBER) that the U.S. economy had
entered a recession in March 2001, brining an end to the 10-year
expansion. Only last month, the NBER’s Business Cycle Dating Committee
confirmed its November recession call and postponed a decision on
determining the end of the recession to a later date. According to a
National Association for Business Economics (NABE), survey the economic
slowdown has probably already ended and just two of the thirty-seven
panellists polled by NABE think sustained growth will not resume until
after the second quarter. Nevertheless, some analysts do not share the
general optimism and caution that the US economy may fall back into
recession. The fourth quarter pick-up would thus simply constitute a
spike temporary spike in a double-dip or W-shaped recession. The
pessimists are clearly in minority a though and the average forecast for
GDP growth this year was lifted by 0.4 percentage points since last month
to 1.6%.
- Leading indicators bode well for
recovery
Whether or not the US has been, is or will be in recession may be finally
decided at a later moment. For the time being, most signs indicate that
economic activity is picking up. In late February, the Conference Board
announced that the U.S. leading index increased for the fourth consecutive
month and that the six-month growth rate of the leading index has
improved. In addition, the Board stated that the coincident index
appeared to be bottoming out in the past two months, as the rate of
decline of non-agricultural payrolls and industrial production slowed
while personal income and manufacturing sales essentially held their
ground.
- Manufacturing industry poised for
rebound
On 1 March, the Institute for Supply Management (ISM) reported that
economic activity in the manufacturing sector grew in February, ending 18
consecutive months of decline. According to the latest Manufacturing ISM
Report on Business, February signalled the turnaround for manufacturing,
based on a strong Purchasing Managers’ Index (PMI) reading and an
accelerating trend in new orders and production.
- Unemployment drops for the first
time since July last year
Finally, on 8 March, the Labor Department reported that the unemployment
rate fell from 5.6% in January to 5.5% in February. The February decline
represents the first decline in unemployment since July last year. Even
though the positive reading was in part due to seasonal factors, it still
surprised to the upside -- the market had expected unemployment to
increase to 5.8% -- and underscores the recovery as the economy added an
unexpected 66,000 jobs outside the farm sector. The report was
particularly surprising given that unemployment rate typically lags the
rest of the economy on the ups and downs of the business cycle.
- Bush signs stimulus package into
law as economy begins to pick up on its own
Just as the economic slump is drawing to an end, the Senate approved an
economic stimulus package after months of partisan gridlock. The
legislation temporarily extends unemployment benefits and gives tax breaks
to businesses. On 9 March, President Bush signed the bill, which is a
toned down version of the package passed last year by the House. Even
though the economic stimulus bill falls well short of initial plans by the
Bush administration, it is projected to pump US$ 51 billion into the
economy this year – just short of the size of Peru’s GDP.
Note: The above text is an abridged version of the LatinFocus
Consensus Forecast briefing for Latin America. For more details
please click
here.
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