Domestic Consumption Growth Brightens Economic Outlook
The outlook for most economies in the Americas region improved during the fourth quarter as domestic consumption growth was sustained and the anticipated revival in global demand has lifted the prospects for export growth this year. Partly helped by fiscal and monetary policy measures introduced since 2011, consumer demand has held up across most countries in the region.
In countries such as Brazil where domestic demand also weakened, aggressive interest rate cuts and fiscal incentives have helped start a recovery. Though the ongoing recession in Europe continues to limit consumption in that region, demand for industrial commodities appears to be improving in other parts of the world such as Asia. Select commodity prices have already started reacting positively and Latin American countries that are significant exporters of materials are expected to see a revival in export growth in 2013.
The improved outlook for the U.S. economy is likely to be among the drivers of growth in the region this year, as the U.S. is the major market for exports from several countries in the region. Apart from Mexico and Canada, which ship nearly 80 percent of their total exports to the U.S., countries such as Colombia also count on U.S. demand to support their economic growth. While increased demand for materials from Asia have made Brazil, Chile, and Peru less dependent on the U.S. over the last decade, these countries are likely to rely on higher shipments to the U.S. to offset weak demand in Europe.
United States: Fiscal cliff deal and conciliatory tone of debt limit negotiations help reduce risks to the economy
Growth prospects for the world’s largest economy have turned brighter in recent months as the continuing housing market recovery and moderate labor market gains have helped sustain consumer spending. Retail sales growth sustained a moderate, but healthy, pace during the last quarter, also helped by seasonal spending for the holidays. Manufacturing sector output expanded again during the fourth quarter, after the weak trend during the previous quarter. GDP growth for the third quarter was revised higher to 3.1 percent annualized, though the higher government spending and inventory gains that helped the economy during the quarter are less likely to be sustained. The unemployment rate declined to 7.8 percent towards the end of 2012, as the average monthly job additions for the fourth quarter remained at a steady 150,000.
During the last week of December, U.S. lawmakers put together an agreement to avert the “fiscal cliff”, the concerted spending cuts and tax hikes that were set to kick in during 2013. This has helped avoid the risk of another economic slowdown, and a possible recession. Following the agreement, income tax rates will remain unchanged for most taxpayers and some of the anticipated cuts in federal government spending have been prevented. However, payroll taxes will go up in 2013 and this has already led to a dip in consumer sentiment during the month of December. In addition, additional spending cuts scheduled to begin in March have not been included in the December agreement.
Though the fiscal cliff has been largely avoided with a last minute deal, the risk of another political standoff over increasing the federal government’s borrowing limit remains. The U.S. federal government reached its borrowing limit towards the end of 2012, and the treasury department now estimates that extraordinary measures in place will allow the government to pay for expenses and repay all debt falling due until the second half of February. Unless the borrowing limit is enhanced before then, some government functions will have to be curtailed and the possibility of a default will rise. This could lead to credit rating downgrades that will be highly negative for the financial markets. Nevertheless, though early statements indicated wide differences that are difficult to bridge, recent statements from lawmakers have been more conciliatory and have strengthened the prospects of an agreement.
The housing market recovery appears to be gaining strength as recent data suggests all around improvement in most indicators for the sector. Average home prices have been rising moderately across most major cities in recent months while confidence among homebuilders remains high. Though existing home sales have seen some volatility, the broader sales trends appear to be positive. Helped by the Federal Reserve’s renewed mortgage bond purchases, mortgage rates remain at record lows and are encouraging more buyers into the housing market. Housing inventories have also seen a steady decline recently, which could help support home prices in coming months, unless offset by an unexpected rise in foreclosures. Banks are also lending more as their balance sheets have been mostly repaired and since profitability has improved. A continued housing recovery is essential to sustain the labor market gains through job additions in the construction and related sectors.
Canada: Sustained consumer spending and global demand revival lift growth outlook
Recent economic data releases suggest that the Canadian economy is seeing a moderate improvement in trends, and the expected revival in global demand could help the recovery even further. Retail sales expanded at a steady pace through the fourth quarter, though sales volume growth for December was lower than expected. The unemployment rate fell to its lowest in nearly four years in December, as the economy added 40,000 jobs during the month and 59,300 jobs in November. Average income levels have also seen a rising trend in recent months while consumer confidence improved in December, after remaining weak during the previous two months, and could support sustained growth in retail sales. The anticipated steady growth in U.S. demand could help exports of manufactured goods from Canada, while the moderate recovery in global demand has lifted the prospects of commodity exports. The IMF expects the Canadian economy to expand by close to 2 percent this year.
The Bank of Canada has maintained its benchmark rate unchanged at 1 percent for the last two years, making it the only central bank among major developed countries that has not deployed aggressive monetary easing to revive growth during this period. The central bank was discouraged from cutting rates by the fear of yet another housing bubble, and concerns over rising household debt, which touched a record high of 165 percent of household income during the third quarter of 2012. The bank kept its policy even when economic growth declined to 0.6 percent during the third quarter of 2012, on weaker exports and business investments. Now the International Monetary Fund has asked the Bank of Canada not to raise its benchmark rates before the end of 2013, or until economic growth gains strength. Meanwhile, the Bank said the worsening of the Euro-zone crisis remains the most important risk facing the Canadian economy and financial system.
Concerns about overheating in Canada’s housing market have eased as the pace of gains in average home prices has moderated and sales of existing homes declined. The Canadian housing market saw a swift recovery after declining in 2008 and average prices moved closer to earlier peaks. The government stepped in last year with measures to limit further expansion, including tighter mortgage rules. As a result, average home prices increased only about 1 percent in 2012 from a year ago and the decline in home sales during the second half of 2012 effectively offset the gains during earlier months. Rating agency S&P downgraded several Canadian banks during the fourth quarter, citing high home prices and average debt levels as risks.
Brazil: Last year’s aggressive policy steps expected to revive growth
The outlook for the Brazilian economy has improved moderately in recent months as the fiscal and monetary measures implemented during 2012 are expected to have a positive impact on growth this year. In addition, the moderate revival in global demand and prices for industrial commodities such as iron ore could help exports from Brazil. After declining during the first half of 2012, retail sales have expanded for six successive months through November. Industrial output also started rising again towards the end of last year, though the improvement has been only marginal so far. Unemployment declined further in December, though job additions and wage increases were lower compared to the previous year. Brazil’s central bank has estimated that the economy expanded by only 1 percent in 2012, compared to 2.7 percent and 7.5 percent during the previous two years. For the current year, economists surveyed by the central bank expect GDP growth of 3.2 percent.
Fiscal and monetary policy responses in Brazil during 2012 have been the most aggressive among large economies, as the government and the central bank sought to reverse one of the worst growth slowdowns in the country’s recent history. A series of tax cuts have been announced since 2011 to benefit exporters as well as boost domestic consumption. The government also announced a major expansion of its long term plans to build the country’s road and railway networks. In addition, the government took steps to reduce electricity rates in the country and stepped up its purchases of vehicles and equipment. On its part, the central bank continued its aggressive rate cuts and lowered the benchmark interest rate to the lowest level in the country’s history. The bank also cut reserve requirements of banks to boost lending, and support domestic consumption growth. As inflation trends remain favorable, the central bank has indicated that it would keep the benchmark rate low for a longer period.
Successive rate cuts and other measures by the central bank weakened the Brazilian real during 2012 and prevented further decline in exports. The currency lost more than 8 percent during the year, allowing the country’s exports to remain price competitive in international markets. Nevertheless, exports from the country declined more than 5 percent on lower global demand for industrial commodities. Though imports to Brazil also slipped, the country’s trade surplus narrowed to the lowest in nearly a decade. The central bank expects the trade surplus to decline further, and the current account deficit to widen, in 2013, as the recovery will likely lift imports on stronger domestic demand.
Mexico: Outlook remains positive on favorable trends in external demand
An improved outlook for consumer demand in the U.S. has lifted the prospects for the Mexican economic growth in 2013, even as domestic demand remains relatively stable. The most significant driver of growth in Mexico is economic conditions in the U.S., the destination of nearly 80 percent of exports from Mexico and a major source of inward remittances from workers. Though third quarter GDP growth was lower than forecasts, the growth rates for the previous two quarters were revised higher. The moderation in growth during the third quarter was mostly due to a decline in farm output and weaker than expected services sector activity. The manufacturing sector continued to expand, though growth in manufacturing exports was restricted by uncertainties related to the fiscal cliff debates in the U.S. The country’s finance ministry as well as economists surveyed by the central bank estimate that the economy expanded 3.9 percent in 2012.
Despite a decline during the last month of the year, automobile exports from Mexico scaled new highs during 2012 as manufacturers are using Mexico as a manufacturing base, especially for smaller cars which are seeing growing demand in the U.S. The increase in auto exports has also helped offset slower export growth in other manufactured goods from the country during last year. Investment proposals by global automobile manufacturers in Mexico exceeded $7 billion over the last two years, and several of those are under construction. However, lower oil prices during the last quarter restricted aggregate exports while import growth was sustained as domestic demand remained robust. As a result, preliminary estimates by the government indicate that Mexico’s trade deficit for the first eleven months of 2012 widened when compared to the previous year.
The Mexican central bank continues to hold its benchmark rate unchanged at 4.5 percent, the level the bank has maintained since the second half of 2009. While moderate inflation risks have been a concern for the central bank in recent years, consumer inflation declined to within the bank’s target range during the first half of December. The central bank now expects inflation to fall again this year, and this positive trend has led to increased expectations that the bank will hold the benchmark rate at the current level for most of 2013. At the same time, the new government of President Pena Nieto has proposed only a moderate increase in spending and will seek to balance the budget for 2013 through increased tax receipts and revenues from oil exports.
Chile: Fourth quarter growth improves on sustained domestic consumption
Economic growth in Chile appears to have accelerated further during the last quarter of the year, on the back of robust domestic consumption growth. GDP growth averaged around 6 percent during the first two months of the quarter, and was above the consensus estimates of economists surveyed by the central bank. The economy had expanded 5.7 percent annualized during the third quarter, helped by higher investments and domestic consumption growth. Retail sales have seen strong growth in 2012, expanding more than 8 percent through November, as unemployment has declined steadily and wages increased. However, industrial growth moderated to the lowest pace for the year in November. The central bank has maintained its benchmark rate unchanged at 5 percent throughout 2012, as inflation in December slipped to the lowest in the region.
However, relatively weak external demand and rising imports to meet domestic consumption growth have narrowed Chile’s trade surplus. While the moderate gains in the Chilean peso have restricted import prices and helped contain inflation, they have also negatively affected exports from the country. According to early estimates from the central bank, the trade surplus more than halved to $4.2 billion in 2012 when compared to the previous year. As a result, the bank estimates that the country’s current account slipped to a deficit of 3.8 percent of GDP in 2012 and will likely worsen to 4.6 percent of GDP this year. Domestic consumption growth is expected to moderate this year, when compared to the previous two years. At the same time, government spending is likely to support the economy as the 2013 budget approved by the parliament envisions a real increase of 5 percent in outlays.
Chile retains its status as the Latin American country with the best rated sovereign debt, after rating agency Standard and Poor’s elevated the country’s credit rating by another level. Chile is now ranked at the same level as China among emerging markets, and this is expected to help keep investor interest in the country alive. S&P, which expects the Chilean economy to expand 5.2 percent in 2013, said the rating upgrade reflects the government’s flexibility to launch stimulus measures and boost domestic demand to counter external uncertainties.
Peru: Strong domestic growth offsets subdued external demand
Strong domestic demand, fueled by higher investments in infrastructure and capacity expansion, has helped Peru sustain healthy economic growth during the last quarter. The country continues to enjoy one of the fastest growth rates in the region, and is expected to outpace most other regional economies in 2013 as well. GDP growth accelerated to an annualized 6.9 percent in November, compared to 6.7 percent during the previous month and above the average for the previous quarters of 2012. Construction activity, which increased nearly 17 percent in November from a year earlier, continues to be the prime driver of the economy. Growth in manufacturing output and retail sales remained healthy during the first two months of the fourth quarter.
Encouraged by the positive trends, Peru’s central bank has lifted its GDP growth forecast for 2012 to 6.3 percent from 6 percent earlier, and expects the economy to maintain a similar pace in 2013 as well. Increased investments in the mining sector and infrastructure are likely to sustain the construction boom in 2013. Part of this expansion is supported by higher industrial investment flows from abroad, which reached a record high of over $11 billion in 2012. At the same time, consumer spending is also expected to be sustained as unemployment remains low and credit growth continues to be healthy even after restrictive measures from the central bank. Unemployment declined to 5.6 percent in December, the lowest in more than a decade and below last year’s 7 percent, and average incomes have increased.
However, currency strength and subdued global demand continue to restrict gains from external trade. Despite a robust recovery in November, exports for the first eleven months of 2012 saw a marginal decline when compared to the same period of the previous year. In December, the Peruvian sol touched its highest level against the U.S. dollar in more than a decade even as the central bank continued to intervene in the currency markets aggressively to prevent further appreciation. While the global demand outlook for commodities such as copper have somewhat improved, with the better prospects of larger economies such as China, export gains for Peru are expected to be subdued for the current year as the currency retains its strength.
Colombia: Economy slows on lower construction activity and weaker exports
After the healthy trends during the first half of 2012, economic growth in Colombia slipped during the third quarter. GDP growth weakened to an annualized rate of 2.1 percent, from 4.9 percent for the previous quarter, as construction activity declined sharply and credit growth slowed. Subsequent data releases suggest modest improvement during the last quarter, as credit growth has held up without further weakness. The country’s urban unemployment rate dropped in November, when compared to a year ago, and is expected to support domestic demand. However, currency gains during 2012 and relatively weak global demand continued to restrict exports, which declined again in November after signs of a recovery during the previous month.
The Colombian government has started peace negotiations with the country’s major militant rebel group to end the civil war that has lasted nearly 50 years and has caused significant loss of lives and economic damage. If successful, it is widely expected that the country’s economic growth will get a boost as land currently under the control of the rebels is opened up for farming. Peace would also improve the prospects of the country’s energy industry as rebel attacks on oil pipelines and other facilities have restricted exploration and production for the last several decades. Colombia is one of the largest oil producers in the region, and most of the country’s energy exports are destined for the U.S. Credit analysts estimate that Colombia’s credit risk profile would not deteriorate even if the peace talks fail, but signs of progress could be positive.
Meanwhile, increased financial market risks following the collapse of Colombia’s largest brokerage firm forced the central bank to announce an unexpected rate cut in November. The central bank lowered the benchmark rate again in December, and said the subdued external environment influenced its decision. The latest cut is the fourth in the last six months and minutes of the meeting released later suggested that the central bank would consider even lower rates in the short term. These expectations have been strengthened after inflation slipped in November below 3 percent, the midpoint of the central bank’s target range.
Argentina: Economic growth remains anemic as domestic demand slumps
The economic environment remains challenging for Argentina as domestic demand continues to be weak on lower investments in infrastructure and industrial capacity additions. While the economic growth rate of 0.7 percent annualized for the third quarter was an improvement from the previous quarter, when the economy came to a standstill, it was well below the annual pace of 8 percent seen in previous years. Industrial production for the first eleven months of 2012 was lower when compared to the same period of the previous year. Property transactions slumped in 2012 and dragged down the construction sector. After reports of rioting and looting of supermarkets in some cities, the federal government has asked provincial and city administrations to delay or limit tax increases. Rating agency Fitch has lowered the country’s credit rating again, citing the higher probability of a sovereign default.
Despite the Argentinean peso’s decline in 2012 and improved demand from neighboring Brazil, exports remain restrained. In November, though exports declined, the country’s trade surplus widened as the fall in imports was even greater. The drop in domestic demand and restrictions by the government have led to a meaningful fall in imports into the country. Early estimates by the government suggest that the trade surplus for 2012 increased by nearly 20 percent when compared to the previous year. As investment flows to the country remain lackluster, the trade surplus is the most significant source of foreign currency for Argentina. The government has recently offered to lower export taxes on oil, to boost shipments and attract more investments.
However, expectations of record soybean and corn crops and stable international prices for farm produce have moderately improved the outlook for 2013. The U.S. department of agriculture estimates that Argentina is likely to see its highest output ever for soybeans and corn during the harvest season starting March. The central bank expects the economy to expand 4.6 percent in 2013, compared to an estimated 2 percent for last year.
For a free subscription to any of our economic report offerings, please visit our Subscriptions page.
If you are a Financial Professional, we invite you to register here for our exclusive content.
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.
© Thomas White International
