A sudden rise in unemployment, declining investment activity and a downward trend in leading indicators indicate that the slump in the U.S. economy is spilling over to Mexico at a quicker pace than expected by most analysts.  If the steep drop in inflation experienced in February, is sustained the Central Bank may gain manoeuvring room to bolster the economy by easing its monetary policy.

Fourth quarter growth lower than expected.  In the fourth quarter, Gross Domestic Product (GDP) increased by 5.1% in real terms over the same quarter in 1999.  The fourth quarter reading was significantly below market expectations, as the speed at which lower U.S. growth spilled over to Mexico caught many analysts by surprise.  In addition, the National Institute of Statistics, Geography and Informatics (INEGI) revised GDP growth for the first quarter downward from 7.9% to 7.7%.  Growth figures for the second quarter (+7.6% year-over-year) remained unchanged and the third quarter data was revised upward from 7.0% to 7.3% yoy.  

Services lead growth.  The services sector led growth in the fourth quarter with an expansion of 5.9% over the same quarter in 1999, driven by a 9.5% pickup in commerce, restaurants and hotels and 8.6% growth in the transport, storage and communications sub-sector.  Financial services expanded at a lesser 4.0% rate, while public services exhibited the slowest growth within services, registering a mere 2.2% expansion.  However, even though growth in services remained healthy, the fourth quarter reading marks a notable deceleration from the 7.9% registered in the third quarter.  

Significant slowdown in manufacturing.  Industrial activity growth also plummeted over the third quarter.  The 6.7% yoy expansion in the third quarter was followed up by a 3.8% yoy uptick in the fourth quarter.  Activity in the all-important manufacturing industry increased just 4.4%, following 7.1% third quarter growth.  The steepest downturns, however, were observed in mining, were activity dropped from 6.3% in the third quarter to 1.4% in Q4, and construction, which added 1.1%, but decelerated from 5.2% growth in Q3.  The agriculture sector continued to grow at a slow pace in the fourth quarter with a 2.3% expansion. 

Record growth in 2000.  The 6.9% growth experienced in 2000 was at the fastest pace since 1981.  The record performance was propelled by the strong U.S. economy, which stimulated strong demand for manufactured goods in Mexico.  Additionally, high oil prices generated extra-government revenue to boost spending.  Finally, private consumption grew strongly over 1999, adding further demand from the domestic side. 

U.S. slump spilling over.  However, Mexico is expected to suffer dearly from the economic downturn in the United States this year.  Revised data from the U.S. government indicate that the economy grew a mere 1.1% in the fourth quarter, the slowest growth rate in 5 years.  Nevertheless, the speed at which U.S. growth downturn spilled over to Mexico caught many analysts by surprise.  According to last month’s Consensus Forecast, analysts had estimated fourth quarter GDP growth at 6.2%, which would have represented further growth in the fourth quarter over the third quarter.  Instead, seasonally adjusted figures show that GDP remained virtually unchanged over the third quarter (+0.03%).  

Further deceleration ahead prompts downward adjustments to growth forecasts.  Additional indicators also point towards a further growth moderation ahead.  In January, Mexican unemployment rose from a historic low of 1.9% in December to 2.3% and the leading indicator for December registered a 1.0 percentage point decline over November 2000.  This represents the third consecutive decline and indicates that economic growth in the coming months will continue to slump.  In addition, seasonally adjusted data for December gross fixed investment indicate declining investment activity.  Following the unmistakable signs of a slowdown panellists have applied yet another significant cut to their projections.  

Recovery seen towards the end of the year.  However, since most analysts anticipate a recovery of the U.S. economy in the second half of this year, the downturn in the Mexican economy should remain a temporary phenomenon.  In fact, this month’s Consensus Forecast suggests that while growth will continue to wane until the third quarter this year, economic activity should begin recovering in the last quarter. 

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