Outlook for the Americas: Are the Clouds Lifting? Presented to: Global Insight Outlook Seminar...

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.


North America Produces 91% of Americas’ GDP …

Mexico5%Canada

6%

South America

7% Central America & Caribbean

2%

United States80%

(Percent of Americas’ GDP, 2002)


… with Half of the Region’s Population

United States34%

Caribbean4%

South America

42%

Central America

4%

Canada 4%

Mexico12%

(Percent of Americas’ Population, 2002)


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)


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.


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


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


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


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


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


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


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


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


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


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)


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



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)


Real U.S. Exports and Imports Reflect the Business Cycle and Exchange Rates


-12

-8

-4

0

4

8

12

16

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Real Exports Real Imports


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.


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)


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.


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)


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



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.


Brazil’s Economy Gradually Improves

-4

-2

0

2

4

6

8

1986 1989 1992 1995 1998 2001 2004 2007

Brazil South America



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.


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



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.


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.


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)


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.


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)


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)


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.


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)


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


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

Outlook for the Americas: Are the Clouds Lifting? Presented to: Global Insight Outlook Seminar...

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