The increased uncertainty about the scope of a second half recovery in the United States has spilled over to Mexico and prompted yet another downward revision to this year’s growth outlook.  On a positive note, inflationary expectations have dropped below the Central Bank’s official inflation target for the first time in years, as the strong Peso and weaker domestic demand lower inflationary pressures. 

Investment plummets but private consumption remains healthy in the first quarter.  The National Statistical Institute (INEGI) reported that aggregate demand increased 3.0% in the first quarter compared to the same period last year.  This represents a marked slowdown from the 8.0% in the fourth quarter 2000 and the double-digit rates registered in the first three quarters last year.  Gross fixed investment experienced the strongest deceleration from the healthy expansion observed last year, barely remaining in positive territory with 0.4% year-over-year growth (Q4: +7.6%).  Consumption, on the other hand, continued with a strong 5.3% increase, following 6.6% growth in the fourth quarter.  The rate at which consumption continued to grow is even more remarkable if one takes the 3.0% contraction of government consumption into consideration.  Private consumption grew 6.5%, barley more than one percentage point lower than in the fourth quarter.  Exports increased 4.7% over the January-March 2000 period in real terms whereas imports expanded 6.3%, led by consumer goods.  As reported in last month’s edition, GDP expanded by just 1.9% in the first quarter.

April and May data releases presage an even weaker second quarter and prompt renewed downward revisions to GDP growth forecasts for 2001.  Data released so far for the second quarter point towards a further downturn in economic growth.  In April, the monthly global indicator of economic activity (IGAE) increased by 1.3% over the same month last year and the annual average growth rate dropped below 5% for the first time since February 2000.  Industrial production declined 3.2% annually in April (-1.4% over March seasonally adjusted) as the manufacturing sector continued to adjust to lower demand from the United States.  April retail sales data indicate that private consumption could be trailing off.  In April, retail sales increased 4.6% compared to the same month last year.  This is the slowest annual rate reported since August 1999.  While it is still to early to determine a clear downward trend – in March retail sales data surprised on the upside with a 10.1% expansion – the data may portend weaker consumption in the second quarter.  In addition, unemployment shifted from 2.3% in April to 2.5% in May, higher than analysts' expectations of 2.3%, which could also translate into reduced appetite for consumer spending.  The recent slump has prompted panellists to shave off another 0.4 percentage points from their second quarter economic growth forecasts since last month.  The increasing uncertainty about a quick recovery in the United States is also reflected in this month’s projections.  Third quarter GDP growth has been slashed 0.6 percentage points and fourth quarter forecasts by 0.2 percentage points.  As a result, annual GDP growth is now seen much lower than last month.  Moreover, the pessimism is also spilling over into next year’s expectations.

Strong drop in tax revenues compensated by public sector entities.  On 2 July, the government released its second monthly public finances and public debt report.  According to the finance ministry, the public sector registered an overall surplus of 1.7 billion Pesos (US$ 186 million) in May, compared to a 91.4 million Pesos (US$ 9.3 million) deficit reported for the same month last year.  In the first five months of the year, the overall accrued surplus was 32.1 billion Pesos (US$ 3.4 billion), which represents an increase of 10.5% in real terms with respect to the same period last year.  In May, total revenues (excluding public entities under indirect budgetary control) increased 1.4% in real terms compared to May 2000, driven by a strong increase in public sector entities’ revenue, whereas tax revenues declined by 4.1%.  Value-added tax (VAT) collection experienced the biggest drop (-11.0%) followed by income tax collection, which was down 2.4%.  Total expenditures increased by 3.5% in real terms.  Panellists have maintained their fiscal deficit forecast for this year.

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