Vicente Fox, who was sworn in as president on 1 December, could hardly inherit a more robust economy from his predecessor Ernesto Zedillo.  The economy is up on all fronts: Exports continue to profit from burgeoning U.S. demand, fuelling investment activities, and consumption continues to grow amid record low unemployment and rising real wages.  The anticipated slowdown in the United States is the only caveat for the growth outlook in the coming year.

Fox sworn in as President.  On 1 December, Vicente Fox assumed the presidency in Mexico.  The new president’s key cabinet appointments were well received by the markets.  Particularly, the nomination of Francisco Gil Díaz as Finance Mister was interpreted by international financial markets as a signal that Fox will stay the course of conservative economics based on cutting budget deficits and fighting inflation.  Since December 1997, Díaz has been chief executive of long-distance telephone operator Avantel.  But more importantly, Díaz acted as deputy finance minister under former president Carlos Salinas de Gortari.  The zeal with which he cracked down on tax evasion has earned him such nicknames as "Iron Tax-man" and “Fiscal Terrorist”.  Díaz is expected to be the key to Fox’s tax initiative, which seeks to increase non-oil tax revenues from the current 11% of GDP (among the lowest in Latin America) to 16% of GDP.  In fact, Díaz has already announced that he will crack down particularly hard on financial groups and large holding companies, which will be excluded from the planned tax amnesty.

Fox appointed Luis Ernesto Derbez as the head of the newly created Economy Ministry, an expanded version of the old Commerce Ministry.  As a trained economist, Derbez worked 14 years at the World Bank and the last three years as a professor at the Monterrey Technological Institute, from where he advised companies and Fox's election campaign.  Furthermore, Derbez headed up Fox's economic transition team after the 2 July presidential election and gained investors' confidence by laying out clear plans for the government’s fiscal agenda.  Implementing the policy agenda will not come easy, since Fox lacks a majority in Congress to push through significant reforms needed to raise tax revenues and pay for a broad scale education, health and poverty relief programme promised during his electoral campaign.

Economy remains buoyant.  Fox inherits a robust economy from his predecessor Ernesto Zedillo.  In the third quarter, Mexican GDP increased by 7.0% in real terms compared to the same period last year.  This was the 19th consecutive quarterly increase of GDP.  Taking into account the strong expansion rates observed in the first and second quarter this year (7.9% and 7.6% respectively), GDP increased by 7.5% in the first nine months compared with the same period 1999.  As in the second quarter, the service sector was the most dynamic sector, expanding 7.3% year-over-year, led by transport, storage and communications (+13.0% year-over-year) and commerce, restaurants and hotels (+11.0% yoy).  Financial services and real estate services expanded by 3.7%, while government services added 2.7% over the same quarter last year.  The industrial sector grew by 6.8% in the third quarter, somewhat below the 7.1% reported in the second quarter.  The manufacturing industry, which accounts for the bulk of industry, turned in the highest growth rate within the industry category, adding 7.2%, followed by electricity, gas and water (+6.4%), mining (+6.0%) and construction (+5.1%).  Agriculture was the slowest growing sector, with 4.7% growth.

The strong performance of the Mexican economy had been largely expected as industrial production and retail sales data released earlier, indicated that the Mexican economy continued to expand at an unrelenting pace.  The factors that propelled the economy in the first half this year remained in place: the U.S. economy continued on a favourable trajectory, prompting a strong demand for manufactured goods from Mexico, and oil prices remained high, which provided the government with substantial extra-revenues to boost spending.  In addition, consumer confidence has been rising, which has provided substantial demand from the domestic side.

Concerns about overheating.  If the economy keeps up the pace, GDP this year will register the fastest expansion in 19 years.  The brisk growth rate has raised concerns about an overheating of the Mexican economy.  As a result, the Central Bank tightened monetary reins in mid-November for the sixth time this year in an attempt to cool the economy.  While the impact of credit tightening has been limited a number of facts indicate that unease about a sustained overheating of the Mexican economy cannot be upheld.  First, seasonally adjusted data indicate that the torrid pace of the first three quarters is on a downward trend.  According to INEGI, quarter-over-quarter growth slowed from 2.8% in the first quarter to 1.6% and 1.4% in the second quarter and third quarter respectively.  Second, wage pressures seem to be easing after having peaked in August, despite the fact that inflationary expectations are only very slowly converging with the Central Bank’s target.  And finally, most analysts expect the U.S. economy to slow in 2001.  Thus, one of the main drivers behind Mexican economic growth will be absent next year.  Panellists have therefore revised their growth prospects for next year downward.

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