Latin America and the Global Slowdown: Key Outcomes from the World Economic Climate Index

 

The CESifo recently released their World Economic Survey (WES). In this piece we summarize the main results of that publication with emphasis in the key outcomes for the Latin America region. The main results of the report are interesting especially because it allow us to compare the economic climate among the main regions of the world. The fact that the results are standardized allows us to compare the regions without further bias.

 

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According to the CESifo, the world economic climate continued to deteriorate in October 2008 (see Figure 1). The assessments of the present economic situation fell in October clearly below the satisfactory level, on a global average. The economic expectations for the next six months have again been downgraded. The economic downturn has clearly become global. The cooling of the Ifo World Economic Climate has this time affected not only the major economic regions of North America, Western Europe and Asia but also Central and Eastern Europe, Russia, Latin America and Australia. Although, surprisingly, in the US the economic expectations brightened somewhat for the third time in succession, the assessments of the present economic situation have been strongly down-graded. In Western Europe the economic climate indicator has again worsened in nearly all countries of the region. Especially the assessments of the current situation clearly worsened. The economic expectations remained pessimistic. In Asia, the assessments of the current situation deteriorated as well, and the six-month outlook has also been revised downwards. Particularly unfavorable appraisals of the economic situation have been given in Japan, South Korea and Taiwan. The economic climate index strongly declined in the euro area, and in almost all countries of the European area the assessments of the present economic situation deteriorated in October. In the UK, the present economic performance is regarded as very weak too.

The survey is very broad but our main interest is to see how Latin America is fairing the crisis and the economic deterioration vis-à-vis the other regions. According to the WES the global economic weakening has also reached Latin America with the economic climate index falling in October as a whole. However, the diverging economic trends still predominate in the region (see next figure). The present economic situation continues to be favorable in Brazil, Chile, Panama and Paraguay. However, the economic expectations for the next six months here have been strongly down-graded, as in Latin America in general, and point to a pronounced economic cooling. Private consumption, capital expenditures and the export sector are expected to weaken in the near-term. Even though Peru, Trinidad and Tobago and Uruguay present economic performance received high marks on the WES scale, economic expectations for the next six months have also become generally cautious. Also in Argentina and Colombia the economic expectations deteriorated, although the present economic state has been assessed as satisfactory in October. In Argentina, inflation and lack of confidence in government’s economic policy were named as the most important economic problems at present. In Bolivia, Ecuador, El Salvador, Guatemala, Mexico and Venezuela surveyed economists described the present economic state far below the satisfactory level. The economic expectations in all these countries point out to economic weakening in the next six months, especially with respect capital expenditures and private consumption.

When we compare the prospective economic situation in Latin America to the other regions we can say that Latin countries should expect a worsening of the economic scenario in the next six months. The panel below shows that present situation in Latin America is already below satisfactory and is expected to deteriorate further, in a similar scheme as what is seen in Asia. It is also interesting to note the resilience of the Latin America region during 2008, whereas in Asia the economic situation started to worsen by mid July.

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According to the IFO, the medium-term GDP growth outlook for the next 3 to 5 years dropped significantly to 2.5 percent (p.a.) from 3.3 percent reported one year ago for the average of all countries. This is the lowest medium growth estimate since October 2001. The decline in the growth outlook is discernible in all major regions of the world, but is particularly pronounced in Western Europe (from 2.2 percent to 1.3 percent) and in North America (from 2.9 percent to 1.6 percent). In the other large regions of the world the downward correction of the medium-term growth outlook is, in relative terms, much smaller, for example in Oceania from 3.3 percent to 3.1 percent, in Asia from 4.6 percent to 4.1 percent, in Latin America from 4.1 percent to 3.1 percent, in Central and Eastern Europe from 4.6 percent to 3.7 percent.

Some remarkable examples of a “great moderation” in the medium-term growth outlook are Ireland (from 3.8 percent to now – 0.4 percent), United Kingdom (from 2.9 percent to 1.0 percent), the United States (from 2.8 percent to 1.5 percent), Venezuela (from 5.8 percent to 2.3 percent), Nigeria (from 8.0 percent to 4.5 percent), Estonia (from 7.0 percent to 1.9 percent), Latvia (from 7.4 percent to 2.5 percent) and Lithuania (from 5.4 percent to 1.7 percent). On the other hand, the growth outlook has deteriorated only moderately in China (from 9.1 percent to 7.6 percent), India (from 8.6 percent to 7.1 percent) and Japan (from 1.8 percent to 1.5 percent). An upward revision of the medium- term growth outlook was restricted mainly to Saudi-Arabia (from 2.6 percent to 4.8 percent), United Arab Emirates (from 5.8 percent to 6.3 percent), Brazil (from 3.7 percent to 3.9 percent), Peru (from 6.4 percent to 6.9 percent) and somewhat surprisingly in Morocco (from 1.5 percent to 4.9 percent).

Final Remarks

An important conclusion is that the Ifo World Economic Climate has worsened further in the fourth quarter of 2008. The indicator has fallen to its lowest level in more than twenty years. The decline is primarily the result of more unfavorable assessments of the current economic situation, but also the expectations for the coming six months have worsened further. On the whole, the survey data point to a global recession. The cooling of the Ifo World Economic Climate has this time affected not only the major economic regions of North America, Western Europe and Asia but also Central and Eastern Europe, Russia, Latin America and Australia. In the US the current economic situation is regarded as very unfavorable, but the economic expectations for the coming six months are no longer quite so pessimistic as in the first half of the year. In Western Europe the economic climate indicator has again worsened in nearly all countries. Especially the assessments of the current situation have been clearly revised downwards. The economic situation is particularly negative in Spain, Italy, Belgium and Ireland, according to WES experts. In Asia the assessments of the current situation as well as the six-month outlook have been revised downwards.

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