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The average Latin American consumer suffered a minor setback in 2001 as economic activity slowed to the point where job creation could not keep up with demand. Projected economic expansion in the range of 1.7 percent will have a negative trickle down effect on consumption as consumer confidence wanes and more people join the swollen ranks of the informal economy. The most recent estimate of GDP expansion represents a 2-percentage point decline from the estimate of 3.7 percent issued by the IMF in May of 2001. Growth projections for the region were steadily revised downward during 2001, and it appears that sustained upward momentum will be elusive early in 2002. Reductions in growth projections were most pronounced in Mexico and Chile, where the ingredients were in place for robust growth at the outset of 2001. Both nations suffered setbacks in export sales at a time when domestic consumption was weakening.

According to a recent IMF report, "Mexico's main vulnerability continues to be the possibility of a further weakening of economic activity in the United States. Through the first three quarters of 2000, with growth running at over 7 percent, the central policy concern was to avoid overheating; however, GDP and domestic demand growth have since weakened markedly as the growth of exports to the United States- which account for 25 percent of GDP-declined sharply."

Mexico's GDP expansion in 2001 will be less than 1 percent, well below the approximately 6 percent needed to significantly improve the well being of the citizenry. Consumer confidence was shaken most in the northern tier of Mexican states where industrial activity is directly linked with the United States. Mexican economic activity will likely regain momentum toward mid-year 2002, in tandem with activity in the United States.

ARGENTINA CONTRIBUTES TO MERCOSUR'S WOES Argentina's 40-month recession was well entrenched before 2001 got underway. Consumer confidence remained low as the global economic environment deteriorated. Declining consumption in Argentina dampened MERCOSUR trade. Trade problems were further exacerbated by a series of trade disputes between the two MERCOSUR kingpins: Argentina and Brazil.

Over the past four years, Brazil has repeatedly battered its trade partners with a series of currency devaluations. The IMF reports, "The deteriorating situation in the region, and particularly the depreciation of the Brazilian real, in turn adversely affected Argentina in the first six months of 2001. In response, Argentinean authorities further strengthened their program through revenue and expenditure measures designed to bring the fiscal position back on track, along with a series of initiatives to boost productivity and competitiveness. But, while private sector deposits have begun to recover in Argentina, economic activity and confidence are still weak."

The Argentine government made some important strides toward putting its macroeconomic house in order during 2001. Unfortunately every step forward at the domestic level was offset by an external economic setback. Following the crisis in November 2000, economic conditions temporarily improved, but consumer sentiment deteriorated sharply once again in March 2001 due to further weakening of the fiscal position, political turmoil, and renewed concerns about Argentina's high foreign debt.

Brazil is the engine of consumption that drives economic activity in most of its neighboring nations. Brazilian consumption bounced back fairly well from the 1998-99 recession, but was buffeted by a series of adverse shocks in the first half of 2001. Production and sale of consumer goods was negatively impacted by slack demand in Argentina. The productive sector suffered another setback when a serious energy crisis forced rationing of electrical energy during 2001.

SMALLER LATIN ECONOMIES PARTICULARLY VULNERABLE Reduced consumption in Argentina and Brazil contributed to a serious ripple effect in the weaker MERCOSUR economies-Bolivia, Paraguay, and Uruguay. Uruguay's economic prospects turned sour as export sales faltered early in 2001 as foot-and-mouth disease battered agricultural exports and eroded consumer power.

To fend off external economic shocks and remain internationally competitive, Uruguayan authorities have increased the pace of depreciation by widening the currency exchange band. Steeper devaluation may ultimately help win back some export sales, but will inevitably lead to increased inflation. As inflation erodes the consumer power of the average Uruguayan, consumption of imported goods is likely to remain relatively stagnant well into 2002.

Prospects for moderate to strong economic expansion in the Andean region faded as 2001 progressed. Intra-regional trade slowed in line with the global decline in economic activity. In the case of Bolivia and Chile in particular, the slowdown in external demand was exacerbated by weak Argentine consumption.

Chile fared better in 2001 than the other Andes nations by positioning itself as a South American trade hub. Demand for Chilean exports held its own through most of 2001, but the value of exports suffered as international prices of agricultural commodities declined. Modest depreciation of Chile's peso may improve the cost competitive status of exports. It appears now that devaluations will not be severe enough to trigger a wave of inflation, although they could slightly hamper the demand for imported goods.

Declining economic activity tended to undermine the value of regional currencies. The IMF reported, "Capital flows to Latin America weakened in the first half of 2001, and-with the important exception of the Mexican peso-most regional currencies were under downward pressure. As the crisis deepened in Argentina from early July, accompanied by signs of foot-and-mouth disease within the region, these pressures have significantly increased. Sentiment remains very fragile, particularly following the September 11 terrorist attack on the United States."
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Publication:Market Latin America
Geographic Code:30SOU
Date:Dec 1, 2001

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