Global Economy: China's Economic Ties with Its Neighbors Grow - Expand Your Insight

Global Economy
Latin American Update

John Thompson, William C. Gruben, Carlos E. J. M. Zarazaga and Erwan Quintin look at the latest economic conditions in Mexico, Brazil and Argentina.

A look at the three largest Latin American markets reveals recovery in Mexico, lukewarm growth in Brazil and ongoing trouble in Argentina. GDP growth in the second quarter registered 5.8 percent and 2.4 percent (annualized) for Mexico and Brazil, respectively. In contrast, Argentina GDP continued its slide, falling an annualized 22 percent in first quarter 2002 (Chart 1).

Chart 1

Gross Domestic Product
Mexico is recovering at a slow pace. Private analysts surveyed by Banco de México expect real GDP growth to be 1.7 percent for 2002. Average GDP growth forecasts are 2.6 percent for the third quarter and 3.9 percent for fourth quarter in annualized terms. These forecasts may be revised downward due to recent concerns about the U.S. manufacturing sector and disappointing industrial production numbers in June and July in Mexico.

The August minutes of Brazil's COPOM (analogous to the Fed's FOMC) meetings refer to a "loss of dynamism" in the nation's economy. Data released since then have confirmed the deceleration. But while Brazil's economy is sputtering along in the slow lane, it isn't falling off the bridge like Argentina's. Forecasters generally seem to be lowering their expectations of Brazilian GDP growth this year from the 2 percent to the 1 percent range.

Argentina continues to be mired in depression. GDP looks headed for at least a 15 percent decline for the year. Ongoing political controversy and bickering about upcoming presidential elections continue to sow seeds of uncertainty, keeping foreign investors away and reinforcing the economic difficulty. There is speculation that the primary elections, originally scheduled for December, will be skipped altogether and that the presidential elections, with the participation of all possible contenders, will be held at that time instead.

Industrial Production
Industrial production for the three countries reflects overall economic conditions (Chart 2). In Mexico, industrial production rose 3.6 percent (annualized) through the first seven months of 2002. Over the same time period, Brazilian industrial output increased at a higher pace of 7.3 percent (annualized). In Argentina, industrial output continued to decline, falling 6.7 percent from January to July 2002. Since December of 2000, industrial output in Argentina has declined an annualized 22 percent.

Chart 2

Prices
Private analysts surveyed by Banco de México in August expect 2002 CPI inflation to be 5 percent, almost half a point above the central bank's target. After steep price increases in the first four months of the year, inflation in Argentina has come down but is still increasing about 2 to 3 percent per month. Utility prices seem to be frozen and, according to most reports, due for corrections in the order of 50 to 60 percent (Chart 3).

Chart 3

Outlook
Economic activity in the three largest Latin America markets is mixed. Mexico is slowly pulling out of recession. Brazil's economy has lost significant momentum and looks to maintain a sluggish growth rate going forward. And Argentina continues to see red, with turnaround not in sight.

Thompson is an associate economist, Gruben is director of the Center for Latin American Economics and vice president, Zarazaga is executive director of the Center for Latin American Economics and senior economist and Quintin is a senior economist at the Federal Reserve Bank of Dallas.

SUGGESTED CITATION:
Thompson, John, William C. Gruben, Carlos E. J. M. Zarazaga and Erwan Quintin (2002), "Latin American Update," Federal Reserve Bank of Dallas Expand Your Insight, October 17, http://www.dallasfed.org/eyi/global/0210latin.html