The weaker than expected first quarter GDP reading and signs of economic downturn in the United States and in the global economy have prompted yet another downward revision to this year’s growth outlook.  On the positive side, the weaker domestic demand and the strong peso limit inflationary pressures, which has opened up manoeuvring room for the Central Bank to ease without jeopardising its inflation target.  The Central Bank has acted swiftly by loosening its monetary policy, which may alleviate some of the pressures resulting from the weaker external sector.

First quarter economic growth weaker than expected.  On 15 May, the Mexican Finance Ministry reported that Gross Domestic Product (GDP) increased by 1.9% in real terms over the same quarter last year.  Most analysts had expected a significant slowdown in Mexican economic activity in the first quarter, following the 5.1% growth registered in the fourth quarter last year.  Nevertheless, the actual outcome was still slightly below market expectations of 2.2% growth.  According to seasonally adjusted data, the Mexican economy contracted 0.3% in the first quarter this year over the fourth quarter 2000.  The deterioration in economic growth was prompted by a slowdown in the United States, by far Mexico’s most important trade partner -- in 2000, 89% of Mexico’s exports were directed to the United States.  Growth in exports, which was at 27.2% in the first quarter 2000, dropped to 4.6% in the first quarter of this year. 

Services sector compensates for industry weakness.  The impact of the U.S. economic slowdown can also be observed in the sectoral breakdown of GDP.  Industry contracted 1.3% year-over-year in the first quarter, whereas services, which depend more on domestic demand, expanded by 3.9% over the same period.  Agriculture contracted 5.5%.  Within the industry, construction suffered the severest contraction, down 3.8%, followed by a 1.2% contraction in manufacturing.  Mining was virtually unchanged (+0.2%) and electricity, gas and water grew 2.0%.  Within services, commerce, restaurant and hotels expanded 5.9% amid healthy activity in tourism.  Transport, storage and communications also registered strong growth (+5.8% yoy), as investment in new technologies has served to make this the most dynamic sector. Financial services increased 3.7%, while other services rose 1.2%.

Some positive signs in April but forecasts are trimmed nevertheless.  The weaker than expected first quarter GDP results have prompted analysts to further pare their growth forecasts for this year by 0.5 percentage points from last month.  However, positive surprises in April data releases bode well for relatively healthy second quarter results.  Unemployment dropped slightly from 2.33% in March to 2.26% and remained well below market expectations of 2.5%.  In addition, the monthly report on public finances, published for the first time on 30 May, revealed positive results.  According to the Finance Ministry, the public sector balance surplus increased 14.2% over the same month last year and budgetary revenues increased by 5.3%.  Tax revenues grew by 11.2% compared to April last year amid positive results following several government measures to increase revenues by reducing tax evasion.  Pemex revenues and oil rights and royalties, on the other hand, decreased 6.2% over April 2000 in the wake of weaker oil prices – the average price of the Mexican mix is down from US$ 24.6 per barrel last year to US$ 20.0 in May.  Expenditures, on the other hand, increased at a very moderate 0.6% pace in real terms.  Despite the positive news, panellists maintained their public sector deficit forecast virtually unchanged and in line with the government’s deficit target for this year.

Current account deficit improves.  In the first quarter, the current account deficit reached US$ 4.4 billion.  This compares favourably to last year’s first quarter deficit of US$ 4.7 billion (US$ 6.3 billion deficit in the preceding quarter) and was also well below market expectations of US$ 4.8 billion.  Services and transfers improved over the same period last year and thus compensated the deterioration in the trade balance.  The trade deficit almost doubled to US$ 2.2 billion as export growth dropped off from 27.3% in the first quarter last year to 4.1% this year, following the marked slowdown in the United States.  Import growth, on the other hand, remained healthy at 6.7% as domestic demand is slowing with a lag.  The annual current account deficit dropped slightly from the fourth quarter to US$ 17.8 billion.  Panellists see the deficit widening substantially this year to US$ 22.1 billion, principally as a result of the effect of slowing export growth on the trade deficit.

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