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Second
quarter growth comes in strong. On 15
August, the National Institute of Statistics (INEGI) announced that GDP
increased by 7.6% in real terms in the second quarter of 2000 compared to
the same period last year. The strong quarterly result was well
above market expectations of 6.6%. After first quarter growth of
7.9%, the economy expanded 7.8% in the first half of the year compared
with the same period in 1999.
Services
lead growth. According to
INEGI, all
sectors contributed evenly to economic growth in the second quarter:
agriculture increased 7.4%, industry 7.1% and services 7.8%. Within
the industrial sector, manufacturing was the fasted growing sub-sector,
with a 7.2% expansion, closely followed by the construction industry,
which expanded 7.1% year-over-year. Electricity, gas and water grew
6.7% and mining activity, when compared to the first quarter, more than
doubled its growth rate, expanding by 6.5%. Within the services
sector, retail, restaurants and hotels continued the strong first quarter
performance, adding 13.2% year-over-year, trailed by transport, storage
and communications, which grew 12.0%.
The
healthy second quarter performance was driven by a number of factors,
including:
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Strong US growth. Unrelenting US growth has
been key to pulling the Mexican economy out of the sluggish 3.7% expansion
last year and continues to drive a surprisingly strong economic
performance. Buoyant US demand for Mexican products has boosted
growth in the manufacturing industry, particularly in the so-called
maquiladora industry (in-bond manufacturing), which also drove Mexico’s
exports up by 21.8% in the second quarter over the same period last year.
-
High oil prices. The economy is also
benefiting from soaring oil prices. In June, the average price for
the Mexican oil mix reached US$ 26.5 per barrel, 85.6% above the June 1999
level. The oil windfall profits have enabled the government to fund
an 8% increase in spending in the second quarter compared to last year,
while simultaneously incurring a fiscal surplus.
-
Strong peso. Higher oil prices have also
served to bolster the peso, which has been the strongest currency in the
world against the US$ this year. The peso strength has helped to
lower consumer price increases and therefore bring down interest rates,
which, in turn, has boosted consumption and investment.
If
the economy keeps up the pace, it will register the fastest GDP expansion
in 19 years. Some observers have raised concerns that the fast pace
could drive up consumer prices and widen the trade deficit to
unsustainable levels and have called on the Central Bank and the
government to apply the necessary anticipatory brakes to cool off the
economy. While the interest rate has reacted to the Central Bank’s
tightening on 31 July (see last month’s Consensus Forecast) the ability
of the reduction in available credit to stem the current expansion is
limited, since Mexican consumers have learned to live without bank loans
ever since the 1994 Peso Crisis dried up consumer credits. Also,
indirectly, the tightening may even have the contrary effect since higher
interest rates will attract foreign capital, thus strengthening the peso,
which, in turn, may further boost the growing trade deficit (since the
last Consensus Forecast the peso has strengthened further to 9.3 per US$
on 8 September and panellists have revised their forecasts to a year-end
rate of 9.8). Therefore, Central Bank officials as well as private
economists have called on the government to tighten its belt. The
Finance Ministry, however, claims that spending cuts are not necessary,
since its spending program remains on target thanks to the surplus
incurred in the second quarter.
The
strong dynamism of the Mexican economy also further drove down
unemployment. Open unemployment dropped from 2.11% of the
economically active population in June to 2.03% in July. The July
rate was the lowest unemployment rate ever registered for the month of
July and was only slightly above December 1999, when seasonal hiring
brought down unemployment to 2.00%.
In
the light of the recent positive news, panellists have further revised
their projections for 2000 economic growth upward. Nevertheless, as
a result of the anticipated slowdown in the United States, economic growth
is anticipated to slow next year – the only country among the seven
major Latin American economies to experience slower growth than this year.
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