Argentine government statistics agency INDEC has quoted year-on-year inflation of 8.5% in December, down from 9.8% the year before - sparking criticism from economists. The agency is considered the mouthpiece of the economy ministry’s secretariat of domestic commerce, manipulating the estimation of CPI data to soften the threat that inflation poses to Argentina’s economic revival. If inflation is underestimated, it would also imply that real GDP growth is slower than official figures suggest. Independent analysts claim annual inflation was actually between 15-20% in 2007, fuelled by high government spending and tighter supplies following the imposition of price controls. Nevertheless, Credit Suisse expects a pullback to 10.5% inflation in 2008 on the back of a tighter fiscal policy.
There is growing uncertainty over Brazil’s fiscal position this year following government attempts to compensate for the loss of the financial transaction tax known as CPMF. In December, Congress voted against the tax, which was expected to generate 40 billion reais or 1.4% of GDP. Subsequently, the government has announced that it will undertake 20 billion reais of spending cuts but no specific cutbacks have yet been ring-fenced. Analysts predict it will be increasingly difficult for the administration to cut congressional amendments to the 2008 budget. Furthermore, the opposition has already announced its intention to vote against the so-called IOF and CSLL taxes on financial institutions designed to plug the shortfall. In response, there is speculation that 0.5% of GDP could be shed off the projected 3.8% primary fiscal surplus. The finance ministry now argues that this will not jeopardize the overall fiscal position, as infrastructure investment will no longer be included as current budgetary spending.
Romania’s central bank has hiked interest rates by 50bps to 8.0% - a move observers predict is the start of a monetary tightening cycle. The authority is trying to grapple with annual inflation overshooting its 3-5% annual target at 6.6% in 2007, relentless credit growth, loose fiscal policy and a ballooning current account deficit reaching almost 15% of GDP last year. The monetary authority cited “higher public spending in the run-up to forthcoming elections as well as uncertainties over investors’ appetite for emerging market risk” as short-term inflationary risks. Investors believe that the Romanian leu will continue to suffer in the current market environment.
Merrill Lynch has become the first major financial institution to formally declare a US recession. “Friday’s employment report confirmed our suspicions that the economy was transitioning into an official recession towards the end of last year,” the authors of the report Recession a Reality said. The US National Bureau of Economic Research formally rules on such a matter but may not do so until two years after the data becomes available. Merrill Lynch argues that poor US consumer confidence, disappointing sales figures, weak industrial production and 5% unemployment means that “to say that the backdrop is 'recession-like' is akin to an obstetrician telling a woman that she is 'sort of pregnant'”. Nevertheless, some analysts are more sanguine, anticipating a two-quarter slowdown, the effects of which could be mitigated with proactive intervention by the Federal Reserve and continued economic growth globally.