Amid booming domestic demand, the Central Bank
struggles to keep inflationary expectations in line with its medium-term
inflation targets. Aware of
the limited impact of its monetary policy instrumentarium, the Bank has
called upon the government to tighten the nation’s belt.
So far, the government remains reluctant to cut back on spending
and points toward the fiscal surplus achieved in the first half this year
and dampened growth prospects for the coming year.
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First
signs of slowing growth.
According to the
recently inaugurated global indicator for economic activity, that tracks
the GDP on a monthly basis, the economy grew by 6.6% in July over the same
month in 1999. This is the lowest annual growth rate since December
1999 and well below the growth rates registered in the first (+7.9%) and
second quarter of this year (+7.6%). However, according to the
seasonally adjusted data, GDP increased 0.5% over June. Thus, the
economy keeps growing albeit at a slower pace than before.
Services
continued to drive growth, particularly the wholesale and retail sectors
(retail sales increased 10.4% in July on an annual basis following 7.0%
growth in June) as well as hotels. The industrial activity expansion
rate slowed from 7.3% in June to 5.8% year-over-year in July. In
fact, growth in all sectors was below the expansion rates observed in
June. Mining experienced the greatest cut in growth, dropping from
6.9% growth in June to 2.0% in July. The drop in mining was prompted
by lower oil and natural gas production, which offset higher extraction in
mineral mining. The manufacturing industry remained the most dynamic
sector (+6.3% year-over-year) propelled by the buoyant maquiladora
industry, which expanded by 14.3%. The manufacturing industry that
produces for the domestic market added 5.7%, construction 5.1% (June:
6.3%), and electricity, gas and water 4.5% (June: 7.2%).
Strong
upward revision in 2000 growth outlook.
Surprisingly, unemployment experienced a sharp and unexpected rise in
August. According to the National Statistical Institute (INEGI),
unemployment rose to 2.6% in August from 2.0% in July. For the first
time this year, the unemployment rate was above the figure reported for
the same month last year -- in August 1999 unemployment was 2.5%.
Furthermore, the August reading marks the highest rate since June 1999.
Nevertheless, the surge in unemployment should be interpreted as a brief
spike rather than an indication that the Mexican economy is losing steam.
Panellists remain upbeat about this year’s growth prospects and have
hiked their forecasts substantially to from last month. This
represents the fourth consecutive inrease in GDP forecasts. On
the other hand, panelists have revised their forecasts for next year
downward slightly from last month amid signs for a weaker global outlook,
particularly in the United States. Mexico, which directs some 90% of
its exports to its northern neighbour, will be particularly affected by
the expected growth moderation in the US.
Upside
risks to inflation.
In the first half of
September, consumer prices increased 0.45%. While this was the
lowest rate for this period since the Central Bank began providing
bi-monthly results, i.e. since 1988, it was also the fastest pace in seven
months. The increase in consumer prices was mainly due to spikes in
private education, fuels, tortillas, tobacco, electricity and housing.
Nevertheless, the annual rate remained unchanged at 9.1%. Even
though the Central Bank is likely to reach this year’s inflation target
of below 10.0% -- panelists see year-end inflation at 8.8% -- achieving
its the medium-term objective of 3% inflation by 2003 currently seems out
of reach.
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