While Mexico currently boasts one of the world's strongest currencies in addition to declining inflation and falling real interest rates, its dependence on the United States economy has prompted a quick drop from last year’s record growth.  Meanwhile, the government seems ambitious to maintain fiscal discipline and has decided to cut spending amid lower income in the first quarter this year.

Sharp drop in economic growth.  In February, the monthly global indicator of economic activity (IGAE) increased by 0.1% over the same month last year.  The February reading represents a sharp drop from the 3.1% growth rate registered in January and was substantially below market expectations of 2.7% growth.  While the low activity was partially caused by one day less this February, due to the leap year in 2000, it provides further evidence that the U.S. slowdown is spilling over to Mexico at a faster pace than envisioned by most analysts.  The U.S. downturn has particularly affected industrial production, which contracted 3.7% year-over-year in February after 1.9% growth in January.  The maquiladora industry -- the manufacturing sector that produces mainly for the United States and has been a key driver of economic growth since the NAFTA inception -- contracted for the first time since 1994 (February -1.9% yoy).  Services, on the other hand, were less affected by lower demand from the United States and increased by 2.1%.  Nevertheless, the February services figure is less than half the growth observed in January.  Agriculture contracted 3.9%. 

Further deterioration likely.  Additional figures indicate that the worst is yet to come.  In February, investment, which has had an unbroken positive track record since March 1996, entered negative territory, contracting 0.5% over the same month last year.  In addition, on 8 May, the National Statistical Institute (INEGI) informed that the forward-looking indicator dropped 0.5% over January.  While this indicator is composed of highly volatile variables and in fact registered positive growth in January, the past readings indicate that economic growth will continue to deteriorate. 

Further cutbacks in growth forecasts.  The poor reports on economic activity have prompted the Central Bank to cut its growth rate forecasts for the year from 4.5% to 3%.  In its quarterly report on inflation, the Bank estimates that private consumption grew 5% and private investment 1.2% in the first quarter.  The Finance Ministry will report first quarter gross domestic product figures on 15 May.  Until early May, President Vicente Fox had maintained a more optimistic attitude than the Central Bank, expecting at least 4% growth in 2001.  However, following the latest data releases, the government has made a downward correction to this year’s growth projection, which now ranges from 2.5% to 3%.  The Consensus coincides with the more pessimistic government outlook and sees growth further deteriorating in the coming quarters to 2.4% in the second quarter and 2.2% in the third quarter, recovering to 3.7% in the fourth quarter.  For the full year, panellists have further pared their projection for GDP growth to 3.0% from 3.3% expected last month.  Projections for 2002 remain unchanged at 4.6% GDP growth, as the anticipated recovery in the United States is seen to boost demand for Mexican products.

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