March 21, 2002
U.S. EconomyMr. Greenspan’s Testimonies starting with his appearance before the Senate at the end of February are increasingly focusing on a recovery. His interpretation of the recession is as follows: the trigger was in the manufacturing sector as high-tech inventory controls called for sharp cuts in production during 2001, however, the recession was brief, although the events of September 11 aggravated the already weakening economy. While this may have been the mildest downturn in U.S. history, Mr. Greenspan feels the recovery will be more subdued than usual. The Fed’s latest Beige book indicates that the manufacturing and services sectors appear to be on the rebound. The outlook for the recovery is helped by the Fed’s perception that there are still no inflationary risks.
As expected, the Fed did not lower interest rates at their March FOMC meeting, but may begin to raise them after the May or June FOMC meetings. The Fed Funds futures indicate a June Fed Funds rate of 2.00 percent and a July rate of 2.25 percent. We think the Fed wants to have more confirmation of the strength of the recovery before applying the monetary brakes.
This may be the first recession in decades when GDP has not fallen by two consecutive quarters; which leads us to question whether this may have been a border-line recession. Clearly the events of September 11 seemed to push the economy on the side of recession. On the other hand, the great success of U.S. military operations to root out the terrorist organizations have produced the classic war-induced economic rebound. Consumer sentiment in September, as measured by the University of Michigan survey, had dropped to 81.8 from 91.5 in the previous month. The index quickly rebounded to 93 by January of this year. However, the index started to decline in February to 90.7. The success of the first phase of the war against terrorism may have been a real shot in the arm to consumer sentiment, which was reflected in much better than expected spending increases.
On the other hand, we continue to see inflationary pressures in the short-term horizon. Oil prices seem to be moving up again, and a recovery could give businesses an opportunity to improve their profit margins.
Another risk to the U.S. economic outlook, which we have been warning about for some time, is the large external deficit. The current account deficit dipped only slightly to 4.1 percent of GDP last year, from 4.5 percent in 2000. The magnitude of the deficit is still unsustainable. With a recovery, we expect the deficit to approach the 5.0 percent mark this year. Such a large external imbalance is likely to put downward pressures on the dollar, and thus further complicate the Fed’s management of monetary policy. A weaker dollar would result in higher inflation and possibly higher interest rates.
Latin American Economies
Argentina’s government is trying to secure funds from the international community to prop up its shaky economy. The first step would be to obtain the blessing from the IMF. An IMF delegation is currently conducting studies and negotiations in Buenos Aires. However, IMF officials have already indicated that Argentina must formulate a program to reduce the fiscal deficit, as a pre-condition for any loan.
According to the Superintendency of Banks, Bolivian banks had a net loss of US$20.2 million last year. Non-performing loans increased by US$64 million and represented 14.4 percent of total. The good news is that the 2001 loss was less than that of the previous year. The bad news is that the regulators do not see an end to the banking woes in the short term.
The electoral campaign is picking up steam in Brazil. The main candidates are: Luiz Ignazio (Lula) da Silva, the perennial leftist candidate; former health minister Jose Serra, who is a Cornell educated economist and has the endorsement of president Cardoso; and Roseana Sarney, daughter of former president Jose Sarney. Roseana Sarney belongs to the right wing Liberal Front Party, which recently split from Cardoso’s government coalition.
Chile’s Central Bank reduced its benchmark interest rate again from 6.0 to 5.25 percent in support of an economic expansion. The authorities expect strong economic growth in the second half of the year.
President Pastrana finally ended negotiations with the FARC guerrillas and ordered the army to enter and occupy positions within the demilitarized zone, so far in control of the guerrillas. Recent opinion surveys in Colombia show Alvaro Uribe ahead with about 59 percent of preference. Uribe is a dissident liberal, who advocates a firm stance against the guerrilla forces.
Costa Rica is totally absorbed by the second round presidential elections of April 7 between Abel Pacheco and Rolando Araya.
Dominican Republic could have managed to grow by 2.5 percent in 2001 and is poised to reach about 3.2 percent this year.
The IMF approved the last tranche of its agreement with Ecuador, after the government liquidated its arrears with the Paris Club.
Salvadorean exports posted strong growth of 11.9 percent in January, led by the maquila sector, with growth of 23.1 percent.
The severe drought of last year threatens to curtail this year’s sugar production in Honduras.
Preliminary estimates indicate that the Mexican contracted slightly last year by 0.4 percent, while inflation fell to 4.4 percent from 9.0 percent.
The bolivar took a tumble, as oil prices slide and the political situation worsens in Venezuela.