Strong First Quarter GDP.  Mexican GDP increased by 7.9% in real terms during the first quarter of 2000 over the same period in 1999.  The strong quarterly result was well above the LatinFocus Consensus Forecast, which projected growth at 6.6%.  The Q1 reading is the strongest performance of the economy in the past 11 quarters.  In part, the surprisingly high first quarter growth rate is the result of the leap year effect but also clearly reflects that the economy is on a healthy growth path.  Even accounting for the extra workday, GDP expanded at an impressive 7.1% rate.

All sectors surveyed by INEGI contributed to the robust first quarter GDP expansion.  Key to the strong reading was the buoyant industrial sector, which grew by 8.6% compared to the same quarter last year.  Within the industrial sector, manufacturing was the fasted growing sub-sector, registering a 9.4% expansion.  The electricity, gas and water sub-sector increased 7.2% over the same quarter in 1999, while construction grew by 6.9%.  Mining remained the weakest sub-sector, growing only 3.0%.  Nevertheless, mining has recovered somewhat due to higher oil production levels in the wake of adjusted production quotas Mexico agreed to this past March.  The service sector expanded 8.2% compared to Q1 1999 with two of its sub-sectors registering the highest quarterly growth rate of all:  commerce, restaurants and hotels expanded 15.0%, followed by transport, storage and communications with 11.9% growth.  Agriculture trailed behind the other sectors in the first quarter, increasing a mere 0.9%.

A number of reasons account for the surprisingly robust first quarter reading:

-          Strong US growth.  Unrelenting US growth has been the main driver behind the Mexican growth story.  Healthy U.S. demand for Mexican products propelled growth in the manufacturing industry, particularly in the maquiladora industry (in-bond manufacturing).  As a result, Mexico’s exports increased a stunning 26.2%, assisted also in part by higher oil prices.

-          Lower than expected inflation.  Strict monetary policy and fiscal discipline have brought down inflation to single digit figures for the first time since the peso crisis in December 1994.  Since inflationary expectations remain higher than the actual inflation rate, pay increases have outpaced inflation and led to real wage gains.  Wages in manufacturing rose 4.6% in real terms, according to Mexico's Finance Ministry, which also is driving consumption.  In Q1, retail sales were up 9.2% over last year.

-          Better financing terms in international markets.  The major international rating agencies have recently upgraded Mexico, easing restraints on external borrowing for the private and public sector.

-          Higher oil prices.  The economy is also benefiting from higher oil prices.  The average export price of a barrel of Mexican oil was US$ 22.3 in the first quarter, compared with US$ 8.5 for the same period a year earlier.  The oil windfall profits allow the government to increase its spending, while simultaneously keeping a tight lid on its deficit.  Higher oil prices also have bolstered the peso, which has been one of the strongest currencies in the world against the US$.  The peso strength has helped to lower consumer price hikes and therefore brought down interest rates, which, in turn, has boosted consumption and investment.

First quarter GDP increased at a significantly faster pace than in previous quarters and some observers have raised concerns about an overheating of the economy.  The relatively low share of total installed capacity utilized in industry as well as gross fixed investment growth in the order of 11.6% in the first quarter, pave the way for continued strong industrial expansion without significant pressures from the supply side.  And on the demand side, pressures from increasing wages are compensated by productivity increases.  Thus, while the current pace of economic expansion seems unsustainable due to a higher comparison base in 1999, most analysts continue to be upbeat about the Mexican economy.  According to the LatinFocus Consensus Forecast, GDP growth will slow to 5.9% in Q2 2000 and 4.8% and 4.6% in the third and fourth quarter.  However, annual GDP growth is anticipated to reach a strong 5.3%, up from 3.7% in 1999.

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