Americas: Developed Country Outlook Stays Positive, Emerging Economies Face Headwinds
The developed economies in North America continue to see relatively healthier growth prospects this year, while the outlook for the emerging economies in Latin America remains subdued. Trends from both the U.S. and Canada indicate that these economies are recovering from the slowdown at the beginning of the year, caused by adverse weather. Labor markets in both countries saw renewed vigor in March and consumer sentiment has improved accordingly. At the same time, the benchmark rates in both the U.S. and Canada remain on hold even as the U.S. Federal Reserve continues to wind down its asset purchases at a measured rate.
In Latin America, the outlook for the resource exporting countries remains restrained by weak global commodity prices. Prices of iron ore and copper have slipped during the first quarter, lowering the export growth prospects of Brazil, Chile, and Peru. Inflation remains high in Brazil despite the rate hikes, though the central bank has indicated that it may hold the benchmark rate steady during the second quarter. Colombia is likely to see faster growth this year, helped by the stimulus measured initiated last year and higher energy prices. The International Monetary Fund has lowered its growth forecast for Latin America for this year as well as for 2015.
At a Glance
United States: Most major economic trends in March indicate that the U.S. economy has recovered from the slowdown at the start of the year. The labor markets have rebounded with a healthy pace of job additions in February and March, lifting consumer confidence. The Federal Reserve remains on track to wind down its bond purchases completely by the end of this year
Canada: The economy appears to be settling down to steady pace of expansion, helped by the improving external demand and sustained growth in domestic consumption. The Bank of Canada is expected to keep its benchmark rate unchanged this year, as inflation remains below expectations.
Brazil: Exports continued to decline during the first quarter as prices of iron ore slipped further. High inflation is likely to keep the central bank cautious about future monetary policy, though the bank has indicated that it may hold its benchmark rate during the second quarter.
Mexico: Economic data trends during the first two months of the year have been relatively soft. However, the outlook may improve later this year if U.S. consumer demand gathers strength as expected.
Chile: The drop in international prices of copper and other industrial materials continue to restrict the country’s economic outlook. Despite the rise in inflation, the central bank persisted with its rate cuts during the quarter.
Peru: Though the economy had a relatively slow start to this year so far, the central bank and the government are hopeful that growth this year will exceed last year’s pace.
Colombia: Economic growth is likely to accelerate this year, helped by the stimulus measures launched last year. Interest rates remain on hold as inflation remains within the central bank’s target.
Argentina: Lower than expected GDP growth for 2013 has helped the country avoid additional interest payments on some of its bonds. However, the outlook remains weak even as concerns about data credibility persist.
UNITED STATES: ECONOMY LIKELY TO EXPAND AT A HEALTHY PACE THIS YEAR
The U.S. economy appears to have overcome the weather induced slowdown at the start of this year and is settling into a healthy growth pace. Most major economic indicators have shown improvement in March and the U.S. is expected to be the key driver of global economic growth this year. Though fuel prices remain relatively high, consumer confidence has rebounded. This has reflected in retail sales that increased more than expected in March, following more subdued trends in earlier months. Most retailers are optimistic of sustained sales gains during the second quarter as well. Though exports were unexpectedly weak and the trade gap widened in February, the outlook for exports remains healthy as demand is likely to improve in Europe.
The improvement in labor market conditions supports the brighter outlook for domestic demand in the coming months. The economy added 192,000 jobs in March and the gains for the previous two months were revised higher. Over the last one year, the economy has added more than 180,000 jobs every month on average. Though the unemployment rate remained at a relatively high 6.7 percent, the number of people who are unemployed for long periods continues to decline. The average hourly wages were mostly unchanged in March, but wages have seen modest gains since last year.
After the robust gains of the last two years, the pace of growth in the housing market has started moderating. Existing home sales were lower than expected in January and February, though new home sales were relatively healthy. Housing starts have also moderated, reflecting the cautious mood among builders, pulling down construction spending marginally. Monthly gains in average home prices have also moderated in recent months, though select markets continue to see higher prices. While mortgage rates have remained steady in recent months, mortgage applications have slipped. Higher prices and the relatively low inventory of homes available for sales are likely discouraging new buyers.
The Federal Reserve has reduced its bond purchases further and is likely to completely wind down the program before the end of this year. Comments by Fed officials led to heightened concerns about the possibility of an earlier than expected increase in the target rate. However, the Fed has subsequently clarified that interest rates are likely to remain low as guided earlier. In addition, the minutes of the Fed’s most recent meeting indicate that a majority of the policy committee members are in favor of continuing with low interest rates as the labor market is not vigorous enough in their assessment.
CANADA: OVERSEAS DEMAND BRIGHTENS ECONOMIC GROWTH OUTLOOK
The Canadian economy appears to have stabilized at the current moderate pace of growth, helped by the improved export outlook and sustained gains in domestic demand. Exports from Canada expanded nearly 4 percent in February and helped the country report a modest trade surplus, after several months of deficits. Shipments of automobiles, auto parts and energy were higher than expected. The Canadian dollar has weakened against the U.S. dollar since the last quarter of 2013, and has helped exports.
The healthier overseas demand has started reflecting on domestic manufacturing in Canada and has also lifted the labor market outlook. Factory output expanded in February from the previous month, and wholesale sales were also higher in January. Retail sales expanded at the fastest pace in several months in January, helped by strong demand for automobiles. The economy added nearly 43,000 jobs in March, well above expectations and after the previous month’s moderate losses. The unemployment rate declined to 6.9 percent and the labor market gains are likely to help domestic demand in the coming months.
The Bank of Canada maintained its benchmark rate unchanged at 1 percent during the quarter as inflation remains well contained. Consumer price inflation slowed to 1.1 percent in February after the previous month’s gains, well below the 2 percent mid-point of the central bank’s target range. As core inflation remains stable, it is unlikely that the central bank will change the benchmark rate before next year. The housing market is showing signs of cooling off, following the policy measures introduced last year to prevent home prices from overheating. Residential construction activity slipped in March and new residential building permits were lower than expectations in February.
BRAZIL: INFLATION REMAINS HIGH DESPITE LARGE INTEREST RATE HIKES
Brazil’s economic growth outlook continues to be restrained by the relatively soft global demand for industrial commodities. Exports from Brazil declined during the first three months of this year, when compared to last year, and the country had a wide trade deficit during the period. The Brazilian real’s appreciable fall last year has done little to help exports as commodity prices, led by iron ore, have slipped further this year. Brazil’s current account deficit has also widened during the first quarter from last year. The central bank now expects the current account deficit for this year to be close to last year’s $81 billion. Domestic demand also seems to be faltering as automobile production and sales declined further in March.
Despite the steep interest rate hikes, inflation in Brazil continues to run high as the cheaper currency has pushed up import costs. Annual inflation was 6.15 percent in March, well above the mid-point of the central bank’s target range of between 2.5 percent and 6.5 percent. From April of last year to this February, the central bank increased its benchmark rate by a cumulative 3.75 percentage points, the most in any country during this period. The central bank is hopeful that the recent currency gains would limit the rise in import costs and bring down inflation in the coming months. Minutes of the most recent central bank meeting suggest that interest rates may be held steady during the second quarter, unless inflation risks rise further.
Rating agency Standard & Poor’s cut Brazil’s credit rating to the lowest investment grade level. The decision reflects the weak growth outlook for the economy and the worsening fiscal health of the government. The two other major credit rating agencies rate Brazil at a higher investment grade and are not expected to review before the end of this year. The central bank expects foreign industrial investment inflows for 2014 to remain at the same level as last year.
MEXICO: GROWTH COULD REVIVE IF EXPORT DEMAND REVIVES LATER THIS YEAR
The Mexican economy remained subdued during the first quarter, but higher export demand as the U.S. economy strengthens could lift the outlook later this year. The country’s trade gap widened unexpectedly in January as exports declined. However, export shipments recovered in February as U.S. demand improved after the winter slowdown. This has reflected in industrial output trends as well, showing moderate gains for the first two months of this year. Construction activity also appears to be stabilizing after last year’s decline. However, retail sales dropped marginally in January after gaining for the previous two months.
The International Monetary Fund (IMF) has left its growth forecasts unchanged for Mexico, for this year as well as 2015. The IMF now expects the economy to grow 3 percent this year and 3.5 percent in 2015. Mexico’s central bank is expected to lower its growth estimates as the minutes of its most recent meeting indicated apprehensions over the outlook. However, the Mexican government continues to maintain its more optimistic growth forecasts. The government is reportedly planning to step up public spending to support the economy.
After cutting its benchmark rate three times last year, the Mexican central bank has held the rate unchanged so far this year. After an initial spurt at the beginning of the year, inflation has slipped below the upper end of the central bank’s target range. Most economists surveyed by the central bank expect inflation to remain within target and the rate is likely to be stable for the rest of this year. Rating agency Moody’s lifted Mexico’s credit rating in February and the country raised more than $1.6 billion in 100 year bonds denominated in British pounds.
CHILE: ECONOMIC GROWTH OUTLOOK REMAINS WEAK DESPITE RATE CUTS
The Chilean economy continues to face slower growth as global demand for copper and other industrial materials remains subdued. Aggregate growth declined to 2.2 percent annualized during the first two months of this year, when manufacturing output and investments contracted. Nevertheless, retail sales expanded more than expected at the beginning of this year and offset some of the gloom. Economic growth during the last quarter of 2013 at 2.7 percent was also below expectations and pulled down the pace for the full year to 4.1 percent, the slowest in four years. The central bank has lowered its growth estimate for the current year to between 3 percent and 4 percent, as domestic demand and investments are expected to fall short of earlier forecasts. The unemployment rate has increased in recent months and is likely to restrict domestic demand.
Chile’s central bank has persisted with interest rate cuts to shield the economy from further decline. The central bank’s benchmark rate was lowered twice during the first quarter, despite rising inflation. Consumer inflation rose to 3.5 percent in March, close to the upper end of the central bank’s target range. The sharp currency fall since last year has pushed up import costs and is fueling inflation. The Chilean peso is one of the worst performing emerging market currencies over the six month period ended March 2014. Economists surveyed by the central bank expect further rate cuts later this year.
Despite the fall in copper prices, Chile’s largest copper producer is planning to go ahead with its investment plans. The company management believes it is necessary to sustain investments to avoid a steep fall in output in the future as some of its mines have become unproductive. Over the last two years, the company has invested more than $8 billion in new projects and capacity expansion.
PERU: ECONOMIC GROWTH EXPECTED TO ACCELERATE FROM LAST YEAR’S 5 percent
After expanding at a better than expected pace of 5.2 percent during the last quarter of 2013, the Peruvian economy saw a moderate decline at the beginning of this year. Annualized growth slipped to 4.2 percent in January as the manufacturing sector came to a standstill, even as the mining sector continued to grow at a healthy rate despite the fall in international commodity prices. However, the central bank remained optimistic that growth improved later in the first quarter. For the current year, the central bank expects economic growth at close to 6 percent compared to 5 percent achieved during 2013.
Peru’s central bank continued to maintain its benchmark rate unchanged during the first quarter, though the reserve requirements for banks were lowered to help economic growth. Reserve requirements are at a three year low, after the bank cut them twice at the beginning of this year. The central bank said some of the activity indicators and its own surveys of economic expectations suggest a recovery. Though inflation topped the central bank’s upper target of 3 percent in January, prices are expected to rise at a slower pace of 2 percent by the end of this year. The Peruvian sol remained relatively weaker at the beginning of the quarter and the central bank intervened to limit further losses.
The country faced a political crisis in March when the government lost a vote of confidence in the Peruvian Congress after allegations of excessive interference by leaders of the ruling political party in the government’s affairs. The crisis was resolved after a new cabinet appointed by the president won the Congress’s approval. The relatively subdued economic growth in recent quarters, when compared to earlier years, has led to a decline in the government’s approval ratings as well.
COLOMBIA: HELPED BY EARLIER STIMULUS MEASURES, ECONOMIC GROWTH REMAINS HEALTHY
Colombia’s economic growth continues to outpace most other countries in the region, except Peru, helped by sustained gains in construction activity spurred by higher public spending. GDP increased at a faster than expected 4.9 percent during the last three months of 2013, compared to 5.1 percent during the previous quarter. For the year 2013, the economy accelerated at a pace of 4.3 percent against 4 percent for the previous year. The government’s stimulus program that offered subsidies on home mortgages pushed up home building by more than 11 percent and construction activity by over 8 percent during the fourth quarter. Energy and mining production also expanded at a healthy pace, though the manufacturing sector output was mostly unchanged from the same period a year ago.
Despite the robust economic growth, inflation remains under control and the central bank maintained its policy rate at 3.25 percent in February. Though consumer inflation moved up in February, it remains below 3 percent, the mid-point of the central bank’s target range. However, unlike most other emerging market currencies, the Colombian peso has been relatively strong. To prevent excessive currency appreciation, the central bank has pledged to continue its U.S. dollar purchases during the second quarter of this year.
The first round of presidential elections is scheduled for May this year, and the country’s high crime rate related to narcotics trade is one of the major issues. While President Juan Manuel Santos has a good track record of guiding the country’s economy and remains popular among voters, he will be facing a former mayor of Bogota who is credited for completing infrastructure upgrades in the city. Neither candidate is expected to win the required vote share during the first round.
ARGENTINA: LOWER 2013 GDP GROWTH HELPS AVOID ADDITIONAL PAYMENTS TO BONDHOLDERS
The Argentinean economy expanded at a pace of 3 percent last year, according to the revised estimate from the country’s statistical agency. Earlier estimates had indicated that the economy had grown at a faster rate of over close to 5 percent, which appeared too high during a period when the country had faced import restrictions and excessive currency volatility. This led to renewed concerns about data accuracy and the statistical agency changed its calculation methodology to arrive at the lower rate. The government had also launched a new inflation index earlier this year, but its credibility is also under doubt as inflation dropped in February when the sharply lower currency should have pushed up import costs.
The lower growth rate would allow the country to avoid additional payments on bonds linked to economic activity. These bonds were issued last year and would reward investors with additional returns if GDP growth exceeds 3.2 percent during a year. Expecting additional returns, investors had pushed up the prices of these bonds in recent months and the prices have corrected sharply after the revised GDP data was announced.
Unable to control the cost of subsidies on imported energy, which has become costlier after the currency devaluation, the government is planning to reduce them by the second half of this year. The government currently spends close to 5 percent of GDP on subsidies. Argentina had seized control of the country’s largest energy producer last year, and has now agreed to pay $5 billion to the Spanish firm that previously controlled the unit.
FORWARD LOOKING STATEMENTS
This article is for informational purposes only. This article is not intended to provide tax, legal, insurance or other investment advice. Unless otherwise specified, you are solely responsible for determining whether any investment, security or other product or service is appropriate for you based on your personal investment objectives and financial situation. You should consult an attorney or tax professional regarding your specific legal or tax situation. The information contained in this article does not, in any way, constitute investment advice and should not be considered a recommendation to buy or sell any security discussed herein. It should not be assumed that any investment will be profitable or will equal the performance of any security mentioned herein. Thomas White International, Ltd, may, from time to time, have a position or interest in, or may buy, sell or otherwise transact in, or with respect to, a particular security, issuer or market on our own behalf or on behalf of a client account.
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.
(c) Thomas White International
