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Bankers See Anemic Recovery Persisting
This recovery needs to be taken care of, says Santanders Gonzalez
By KEN OLIVER-MENDEZ
May 8, 2003
Top Puerto Rico bankers see the anemic economic recovery on the U.S. mainland and Puerto Rico persisting for the balance of 2003, and dont expect to see marked improvement until next year.
"Our forecast is one of slow growth," Popular Inc. Senior Executive Vice President and CFO Jorge Junquera said during a round of CARIBBEAN BUSINESS interviews with banking leaders on the post-war economic outlook.
As Banco Santander President & CEO Jose Ramon Gonzalez sees it, the economic recovery remains fragile, despite the removal of a great deal of uncertainty as a result of the successful conclusion of the war in Iraq. "The worst in this cycle has passed, but this recovery needs to be taken care of," Gonzalez said.
Both Gonzalez and R&G Financial Chairman of the Board Victor Galan agree that at the local level, the extent to which the government follows through on public construction commitments will be a decisive factor in terms of whether or not the pace of the recovery improves.
"The key that remains to be seen is the governments capacity to execute the public works that have been financed and planned for," said Gonzalez. "I feel confident that it will be done," he added.
"In an election year, the government is going to be pushing its public works, particularly in the special communities," predicted Galan, who noted that in terms of public works the government has had relatively little to show for itself during the past few years.
While Junquera said the forecast at Popular is one of slow economic growth (under the 2% range), he also said acceleration is expected as 2004 gets underway. All three bankers see a rising interest rate scenario in 2004. "There could be a rapid increase of interest rates next year," said Galan.
Most U.S. macroeconomic indicators are currently pointing to a pattern of predominantly weak growth, but some indicators--such as consumer confidence and the expectations index--are more positive in anticipation of a rebound towards moderate growth levels.
Another factor commented on by the bankers consulted was the effect of the weaker U.S. dollar. "The Federal Reserve is not defending the dollar," Galan pointed out. "Its expected the dollar will keep falling, by as much as 20% against the euro," he added.
"This cuts two ways, in that on one hand it makes U.S. products more competitive outside of the U.S. and thus stimulates manufacturing," said Gonzalez. "On the other hand, a declining dollar makes foreign investment in the U.S. less attractive, but I dont see it dramatically affecting that investment."
Galan also commented on the emerging tension between President Bushs economic recovery strategy and the views of Federal Reserve Board Chairman Alan Greenspan. "Greenspan doesnt favor cutting taxes without cutting government expenses, and thats not going to happen in an election year," pointed out Galan.
Meanwhile, U.S. corporate earnings for the first quarter of 2003 (1Q03) were better than anticipated by many analysts, but the caveat is that--in many cases--analysts had earlier ratcheted down earnings estimates under the influence of war jitters. The U.S. economy as a whole grew at a disappointing 1.6% pace during 1Q03.
The Organization for Economic Cooperation on Development last week reduced its world forecast for the remainder of the year, predicting "weak and hesitant growth." At the U.S. level, it appears the key element going forward is whether business investment will pick up. In a speech last week, Fed Gov. Ben Bernanke argued that, based on the economic indicators, business spending should improve.
"Clearly an undercurrent of pessimism has persisted among business leaders for some time now," said Bernanke. "This pessimism doesnt matter, if for no other reason than because it has the potential to become self-fulfilling." Business spending during 1Q03 was down 12% from the same period two years ago.
Westernbank Chairman, President & CEO Frank Stipes pointed out that on the positive side, sharp declines in oil prices should give a significant boost to the economy. "Oil prices are going to continue to drop into the $18 to $22 per barrel range," Stipes said. "Thats a tremendous economic break for everyone, which is better than cutting taxes at this point."
However, in terms of economic cycles, Stipes still doesnt think the economy has gotten out of its recessionary funk. "The outcome of the war has improved perceptions, but not the basic economic elements in the equation," said Stipes.
"Our forecast is that the economy will continue at the same pace it has been since the recession started in early 2001," said Stipes. "Within nine to 15 months from January 2003, the cycle should be over." As Stipes sees it, the new economic cycle that is expected to take hold in 2004 wont necessarily be characterized by a strong growth clip, since the economy is still affected by deflationary pressures.
The evidence of deflation--an inevitable correction following the longest and largest economic growth period of the modern era--is seen in such moves as those by the major U.S. car manufacturers to continue 0% financing to maintain sales, Dells slashing of computer prices, and the consumer financing plans offered by furniture stores.
This Caribbean Business article appears courtesy of Casiano Communications.