After
beating its 2000 inflation target by a wide margin, the Central Bank faces
a more difficult task this year: the peso strength, which last year
assisted the Bank in achieving low inflation, may give way to weakening
this year amid lower oil prices. Resulting inflationary pressures
would have to be countered by higher interest rates without choking off
economic growth, which is already threatened by the slowdown in the United
States.
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Growth
in industry slows in November.
On 11
January, the National Statistical Institute (INEGI) announced that
November industrial production increased 4.6% in real terms over the same
month in 1999. While most analysts had already anticipated a
slowdown from the 7.2% growth registered in October, the November reading
was still well below market expectations of 6.0%. The dismal
November reading was also the lowest annual growth rate registered since
October 1999. The manufacturing industry suffered a major slump,
down to 5.4% from the 8.8% growth recorded in October. In part,
weaker U.S. demand prompted Mexican manufacturers to cut production, which
reduced growth in the maquiladora industry from 14.1% year-over-year in
October to 11.4% in November. More important, however, growth in the
manufacturing industry producing for the domestic market was down from
8.0% in October to 4.8% in November. Lower growth in the
manufacturing industry also spilled over to the energy, gas and water
sector, were growth moderated to 4.2% in November following the healthy
5.9% expansion in October. Construction added 1.9% year-over-year,
down from 2.6% growth in October. On the upside, mining grew at a
faster pace than in October (+1.5% vs. 1.0% in October). Panellists
expect growth in industrial activity to moderate in the last quarter.
In 2001, moderating demand in the United States should further lower the
expansion.
The
monthly indicator for economic activity (IGAE) confirms a slowdown of
economic growth in the last quarter 2000. In October, the IGAE
increased by 6.5% compared to the same month the year before, down from
the 8.2% and 6.9% growth registered in August and September. Since
it is still too early to attribute the recent decreases in economic growth
to a persisting downward trend, panellists have maintained their forecasts
for 2000 GDP growth. For this year, however, the harder than
expected landing of the US economy has the growth forecast again.
Strong
holiday spending prompts surge in inflation.
In December, consumer prices increased 1.08%. While the strong
December price increase was anticipated by most analysts – in fact the
market expected an even higher increase – the December price hike
represented the highest monthly increase since January 2000 and confirmed
the upward trend in inflation observed since July 2000. Fresh fruits
and vegetable price hikes mainly drove the December increase.
Underlying inflation, which excludes fuels and more volatile items, only
increased by 0.56% over November, driven by price increases in housing and
bus transportation. Annual inflation reached 8.96%, well below the
10% target set by the Central Bank at the beginning of the year.
This should further boost the government’s credibility in its fight
against inflation after it also beat its 13% inflation target in 1999.
For 2001, however, the Central Bank’s 6.5% target seems overly
ambitious, according to the Consensus Forecast. Factors, which
assisted the monetary authority in reaching last year’s inflation target
such as the strong peso, are likely to remain absent this year and
panellists believe the impact of slower U.S. growth will not be sufficient
to counter inflationary pressures. The inflationary risks resulting
from a weaker peso have prompted panelists to even hike their inflation
forecast a notch since last month.
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