outlook for the americas: are the clouds lifting? presented to: global insight outlook seminar...
TRANSCRIPT
Outlook for the Americas:Are the Clouds Lifting?
Presented to:Global Insight Outlook Seminar
Atlanta, GeorgiaApril 29, 2003
Presented by:Sara Johnson
Managing Director,Global Macroeconomics Group
Copyright © 2003 Global Insight, Inc.
Copyright © 2003 Global Insight, Inc. 2
The Iraq Cloud Has Lifted; What Next?
• Success in Iraq resolves a major uncertainty, enabling investment, staffing, and travel plans to move forward.
• The United States remains the region’s growth engine. Fiscal stimulus and an upturn in capital spending will boost U.S. growth from 2.6% this year to 4.2% in 2004.
• South America’s political instability threatens its economic progress. Extremely competitive currencies will drive near-term growth in Argentina and Brazil.
• U.S. dollar depreciation will generally help the Americas, with the exception of Canada.
• The 34-nation Free Trade Area of the Americas agreement will move forward, with the goal of 2006 enforcement.
Copyright © 2003 Global Insight, Inc. 3
North America Produces 91% of Americas’ GDP …
Mexico5%Canada
6%
South America
7% Central America & Caribbean
2%
United States80%
(Percent of Americas’ GDP, 2002)
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… with Half of the Region’s Population
United States34%
Caribbean4%
South America
42%
Central America
4%
Canada 4%
Mexico12%
(Percent of Americas’ Population, 2002)
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The U.S. and Canada Are Leading the Recovery
-2
-1
0
1
2
3
4
5
United States Canada Mexico Other Americas
2001 2002 2003 2004 2005
(Percent change, real GDP)
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U.S. Recovery Forces Are in Place
• Expansionary monetary and fiscal policies
• Resilient consumer spending
• End of the high-tech bust
• Lean inventories
• Strong productivity growth
• Low inflation, falling oil prices
• A successful outcome in Iraq sets the stage for solid growth in late 2003 and 2004.
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Reasons for Caution
• U.S. companies are still very risk averse
• Employment losses through March
• Low capacity utilization
• Household financial stress
• Weak export markets
• SARS and geopolitical risks
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The U.S. Expansion Will Strengthen
(Percent change, annual rate) (Percent)
-2
0
2
4
6
8
1998 1999 2000 2001 2002 2003 2004 2005 2006
2
3
4
5
6
7
Real GDP Growth Unemployment Rate
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Shifting Sources of Growth in the U.S. Economy
1998 2001 2002 2003 2004
GDP Growth (%) 4.28 0.25 2.45 2.60 4.18
Contributions
Consumption 3.18 1.67 2.15 1.61 2.67
Structures 0.21 -0.05 -0.52 -0.15 0.19
Equip. & Software 1.27 -0.61 -0.15 0.42 0.86
Residential 0.32 0.01 0.17 0.10 -0.11
Federal -0.05 0.29 0.47 0.69 0.19
State & Local 0.39 0.36 0.35 0.02 0.05
Net Trade -1.20 -0.18 -0.66 -0.14 -0.16
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Price and Wage Inflation Will Stay Mild
(Year-over-year percent change)
-3-2-10123456
1998 1999 2000 2001 2002 2003 2004 2005 2006
CPI Producer Prices Employment Cost Index
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The Federal Reserve Will Start to Raise Interest Rates in December 2003
(Percent)
0
2
4
6
8
10
1998 1999 2000 2001 2002 2003 2004 2005 2006
Federal Funds 10-Year Treasury Yield Mortgage Rate
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Stocks Prices Are Beginning to Recover
0
200
400
600
800
1000
1200
1400
1600
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
0
2000
4000
6000
8000
10000
12000
14000
16000
S&P 500 Wilshire 5000
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Real Consumer Spending and Confidence
(Annual percent change, 1996$) (Michigan Index, 1967=1.0)
0
1
2
3
4
5
6
7
1998 1999 2000 2001 2002 2003 2004 2005 2006
75
80
85
90
95
100
105
110
Real Consumption Growth Consumer Sentiment
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Home-Building Will Decrease in 2003-05
(Housing starts, millions of units)
0.0
0.4
0.8
1.2
1.6
2.0
2.4
1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010
Single-Family Multi-Family
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Manufacturing Capacity Utilization Is Low
65
70
75
80
85
90
1970 1974 1978 1982 1986 1990 1994 1998 2002 2006
(Percent)
1960-2002 average = 81.2
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An Uneven Recovery in Business Investment
-20
-10
0
10
20
30
Structures Computers Software Communic.Equipment
OtherEquipment
2000 2001 2002 2003 2004
(Percent change, 1996 dollars)
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A Surge in Federal Spending: Government Purchases of Goods and Services
-6
-3
0
3
6
9
1990 1992 1994 1996 1998 2000 2002 2004 2006
Federal State & Local
(Year-over-year percent change)
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Government Budgets Are Back in Deficit
-400
-300
-200
-100
0
100
200
300
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
Federal State & Local
(Billions of dollars, fiscal years)
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Real U.S. Exports and Imports Reflect the Business Cycle and Exchange Rates
(Year-over-year percent change)
-12
-8
-4
0
4
8
12
16
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Real Exports Real Imports
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A Healthy Canadian Economy
• Home-building, consumption, and public investment led Canada’s solid 3.4% growth in 2002.
• Business investment is recovering in 2003, but auto and housing markets are cooling off a bit.
• To curb inflation, the Bank of Canada is raising interest rates; its key rate will reach 5% in mid-2004.
• High relative interest rates and a trade surplus will boost the Canadian dollar to 70 U.S. cents in 2004.
• Canada’s failure to support the Iraq war effort has chilled relations with the United States.
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Canada’s Real GDP Growth
-2-1
012
34
56
1986 1989 1992 1995 1998 2001 2004 2007
Canada United States
(Percent change, 1997 dollars)
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Mexico: Integration Under NAFTA
• Mexico’s sluggish recovery is led by consumer spending and construction activity.
• Manufacturing remains weak, awaiting a pick-up in the U.S. economy and maquiladora exports.
• Capital inflows have supported the peso in recent years, hurting competitiveness against China and other emerging markets. The peso is expected to depreciate.
• Mexico has achieved remarkable macroeconomic stability under NAFTA. Cautious monetary policies have lowered inflation to around 5%.
• President Fox’s structural reforms are stalled in the face of PRI opposition; July congressional elections are pivotal.
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Mexico’s Inflation Has Subsided as a Result of Cautious Monetary Policies
0
5
10
15
20
25
30
35
1990 1992 1994 1996 1998 2000 2002 2004 2006
(Consumer price index, percent change)
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Mexico’s Long-Term Economic Growth Is 4-5%
-2
0
2
4
6
8
1986 1989 1992 1995 1998 2001 2004 2007
Mexico United States
(Percent change, real GDP)
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Brazil Has a Difficult Balancing Act
• Brazil faces conflicting challenges—revive growth, subdue inflation, meet debt payments, and improve social conditions and income distribution.
• Growth in agricultural and industrial exports is reviving the economy, but consumption and investment remain weak.
• Capital flight sent the real to new lows in 2002, driving up inflation and interest rates. The Selic rate is 26.5%.
• A large, inefficient government sector is a drag on the economy; taxes take 36% of GDP.
• Foreign capital—essential for strong growth—will return if economic policies are sound. President Lula da Silva aims to enact pension and tax reforms this year.
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Brazil’s Economy Gradually Improves
-4
-2
0
2
4
6
8
1986 1989 1992 1995 1998 2001 2004 2007
Brazil South America
(Percent change, real GDP)
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Argentina Is Still Risky
• Argentina’s economy is recovering from its free fall, but risks remain very high in a fragile political environment.
• After a 70% drop in 2002, the peso has appreciated 20% in recent months, temporarily cooling inflation.
• Import substitution is boosting domestic production and generating a current account surplus.
• The liberation of the corralón (a freeze on time deposits) will provide a needed stimulus to consumer spending.
• Debt default will limit growth for years, since investors have abandoned the country. It will take nearly a decade for real per capita GDP to regain its 1998 peak.
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Argentina and Venezuela: Long Roads to Recovery
-12
-8
-4
0
4
8
12
1990 1992 1994 1996 1998 2000 2002 2004 2006
Argentina Venezuela
(Percent change, real GDP)
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Venezuela in Crisis
• Venezuela’s political turmoil has done lasting damage to PDVSA, business investment, and the economy.
• After an 8.9% contraction in 2002, real GDP is expected to decrease 10% this year.
• Venezuela suspended foreign currency trading in January, effectively paralyzing imports. We expect a 30% bolívar depreciation and 40% CPI inflation in the next 12 months.
• A huge fiscal deficit (7% of GDP) will limit the government’s ability to finance social programs, exacerbating divisions.
• We expect that the Chavez presidency will end by referendum in late 2003 or early 2004.
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Colombia, Chile, and Peru
• Colombia’s economic growth is held back by intensified guerilla violence. President Uribe initiated an expansion of military and police forces, along with major fiscal reforms.
• Chile’s economy will accelerate in 2003 and 2004 as the world economy, copper prices, and exports strengthen.
• Signing of the U.S.-Chile Free Trade Agreement is delayed.
• Peru achieved 5% growth in 2002, thanks to rising copper, zinc, and gold production. Consumer spending and construction are now taking over as engines of growth.
• The halt of President Toledo’s privatization program due to public protests will discourage foreign investment.
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Real GDP Growth in South America
0
1
2
3
4
5
6
Bolivia Chile Colombia Ecuador Peru
2001 2002 2003 2004 2005
(Percent change)
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Caribbean Economies Await Tourism Revival
• The number of international visitors to the Caribbean will decline for a third consecutive year. A strengthening U.S. economy will spark a strong rebound in 2004.
• The Dominican Republic will lead the region’s growth, thanks to inflows of foreign investment, rising exports from the free-trade zone, and an expanding tourism industry.
• Puerto Rico’s manufacturing is declining as the U.S. phases out tax-free repatriation of profits. Public transit and port infrastructure projects are driving growth.
• Trade sanctions and weakness in its tourism, sugar, and nickel industries will undermine Cuba’s economy.
• Trinidad & Tobago is benefiting from investments to develop its oil and gas reserves.
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International Tourism Recoveries Delayed
-8
-4
0
4
8
12
16
1996 1998 2000 2002 2004 2006
North America Caribbean Central & South America
(Percent change in international visitor arrivals)
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Real GDP Growth in the Caribbean
-1
0
1
2
3
4
5
6
Bahamas DominicanRepublic
Jamaica Puerto Rico Trinidad &Tobago
2001 2002 2003 2004 2005
(Real GDP, percent change)
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Central America Depends on Exports
• Central America is struggling with a decline in tourism and weak prices for exports of coffee, sugar, and bananas.
• Costa Rica has the region’s most attractive investment environment--an established democracy, well-educated population, and a stable economy.
• The U.S. has de-certified Guatemala for failure to counter drug trafficking and official corruption. A high crime rate will deter private investment.
• El Salvador sells two-thirds of its exports to the United States and depends on rising remittances from migrants.
• Panama’s growth will pick up in the second half of 2003 as canal traffic and re-exports from the free trade zone recover.
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Real GDP Growth in Central America
0
1
2
3
4
5
6
Costa Rica El Salvador Guatemala Honduras Panama
2001 2002 2003 2004 2005
(Real GDP, percent change)
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Global Insight’s Medium-Term Risk Ratings
0 20 40 60 80 100
Dominican Rep.
Mexico
Panama
Costa Rica
Puerto Rico
Canada
United States
Financial Risk Business Risk
(Five-year risk aggregates) High score = high risk
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Global Insight’s Medium-Term Risk Ratings
0 20 40 60 80 100
Argentina
Venezuela
Brazil
Ecuador
Colombia
Peru
Chile
Financial Risk Business Risk
(Five-year risk aggregates) High score = high risk