U.S.: Economy

The United States economy shows signs of a pronounced slowdown since the third quarter of 2000, but without any recorded decrease in activity that could bear out the assumption that the country is experiencing a recession (a negative variation in the inter-annual GDP over two consecutive quarters). The fact is that the United States had 5% GDP growth in 2000, topping the 4.4% and 4.2% figures of the previous two years.

FIGURE No. 1
U.S.: GROSS DOMESTIC PRODUCT, DOMESTIC DEMAND, AND IMPORTS
(INTER-ANNUAL REAL VARIATION RATE)

SOURCE: United States Department of Commerce

The slowdown in U.S. GDP and the strong decline in indexes of stock market trading (Figure No. 2) are harbingers of a possible worsening of the country’s negative economic growth, with disastrous implications for the world economy. As can be seen in the figure above, U.S. imports took a nosedive in the fourth quarter of last year.

FIGURE No. 2
INDEXES OF STOCK MARKET TRADING

	DOW JONES The Dow Jones Industrial Average (DJIA), introduced by Charles H. Dow in 1896 and encompassing the 30 most representative shares of the important industrial companies, is the oldest known instrument for measuring stock prices.
	NASDAQ The Nasdaq composite index includes industrial, insurance, and banking stock, each of which is weighted in accordance with its market value.

SOURCE: New York Stock Market

This pessimistic outlook for the U.S. economy is reflected in the confidence of U.S. households in the management of the country’s economy (it is tied in with unemployment, inflation, and effective income; bull stock market prices can also play a part in consumer confidence), which between September 2000 and February 2001 systematically plummeted 23%.

FIGURE No. 3
U.S.: CONSUMER CONFIDENCE COEFFICIENT

SOURCE: Conference Board

Starting last month, however, this indicator began to show signs of recovery. (Figure No. 3).

This behavior can be explained as a response to government efforts to avert a recession; three interest rate reductions of one-half percentage point each (two in January and one in March) and current efforts to get Congress to reduce taxes are the main measures taken to promote domestic demand.

In any case, slower U.S. economic growth will undoubtedly have a two-fold impact on the region’s economy, one via trade, and the other through finances.

Impact on the Andean Countries

The impact on trade will be directly proportionate to the importance of the U.S. market for the exports of the region’s countries, which may see the demand for their products shrink heavily. The fact is that the United States is the largest export market for the Andean Community countries, although its relative importance to each of them varies widely. It is considerably more important to Venezuela and Colombia, almost half of whose exports it receives, than to Bolivia, which with 23% of its exports targeting that market, is the least dependent upon it. It should be recalled here that the United States at present absorbs fully one-fourth of the exports of the developing countries. It is interesting to note, however, that the lion’s share of the exports of Ecuador, Colombia, and Venezuela consist of oil, the demand for which is less income-elastic; it is therefore to be expected that this import will not be affected to any significant degree by the slowdown of the world’s largest economy.

TABLE No. 1
CAN - U.S. EXPORTS
(% OF TOTAL EXPORTS)

SOURCE: SICEXT, Andean Community

Even so, it is essential in this context to secure the renewal and broadening of the U.S. Andean Tariff Preferences Act (ATPA), due to expire in December of this year and under which the United States benefits Bolivian, Colombian, Ecuadorian, and Peruvian exports. Otherwise, the situation could get very complicated for the countries in the subregion; the problems created by the decline in U.S. demand for imported goods could be worsened by difficulties in competing with the Caribbean and African countries, whose products currently enjoy larger margins of preference.

The reduction of U.S. domestic interest rates, on the other hand, would favor the Andean countries by bringing down the interest they must pay on their external debt.

It should be stated that foreign debt service weighed heavily on the subregion’s economies at the close of 2000. For Bolivia, the external debt represented 80% of its GDP, while the figure was even larger in the case of Ecuador, at 94%, due to that country’s very large public foreign debt. Assuming that 70% of its external debt was incurred at variable rates of interest, the subregion would save US$ 800 million a year for each percentage point that interest rates are reduced.

TABLE No. 2
CAN: EXTERNAL DEBT
(YEAR 2000)

SOURCE: IMACRO

The reduction of nominal interest rates in the U.S. would have the further effect of decreasing the real interest rate. This would incentivate a renewal of the flow of private capital to the emerging markets, for which private funds constituted the main source of external financing in the 1990s. When the net capital flow to the region peaked in 1997 at US$ 83 billion, over 80% consisted of private funds; by 2000, that percentage had dropped to less than 67% and the total figure to US$ 67 billion (IMF, World Economic Outlook, Oct. 2000).

In the end, what would be the net result for the region of a U.S. recession? The findings of a recent study conducted by the IDB (The Growth-Interest Rate Cycle in the United States and its Consequences for Emerging Markets, 2001) are that in a typical U.S. recessive scenario involving a 3.3% fall in GDP, with a reduction of 1.5 percentage points in real interest rates, Latin America would experience a 0.25% drop in its GDP.

*The statistics used in Economic Report come from the Andean Community General Secretariat Macroeconomic Information (IMACRO) system, which is based on data obtained from the official sources of the CAN Member Countries, together with supplementary information provided by international institutions like the World Bank, the IDB, ECLAC, and the IMF.