The slump in Mexico’s external sector, induced by lower U.S. demand, is spilling over to domestic economic activity and has caused further downward revisions in the growth outlook for this year.  On a positive note, weaker domestic demand, fiscal discipline and the continued strength of the Mexican Peso have lowered inflationary expectations.  As a result, the Central Bank has gained more manoeuvring room to lower interest rates, which have dropped to historic lows.

Sharper than expected slowdown in May.  Recent economic data releases have been ugly and indicate that the Mexican economy is headed for an even steeper nosedive than expected last month.  In May, the global economic activity indicator contracted 0.4% compared to the same month last year.  The sharper-than-expected slowdown represented the first actual contraction in economic activity since January 1996 and reflects the fact that the slump in industry, induced by weaker demand from the United States, is spilling over to the services sector (+1.3% year-over-year), which so far had been robust due to the more resilient domestic demand.  Industrial production dropped 3.4%, only a slight deterioration compared to the 3.3% contraction registered in April but one percentage point below last month’s Consensus Forecast figure.  Within industrial production, the construction sector is the most affected sub-sector (-8.0% year-over-year) and now exhibits a firm downward trend.  The maquiladora industry also continued its deceleration (down 5.6% yoy, the weakest result since reporting began in 1994), as U.S. companies continue to scale back their output.  Given the weak industrial production reading, the 5.4% contraction in gross fixed investment registered in May was not surprising, although it still represents the most pronounced drop since January 1996.  While consumption remained in positive territory, it also followed the general downward trend.  According to the National Statistical Institute (INEGI), retail sales growth slowed to 3.5% in May from 4.6% in April and the annual average growth rate has now dropped to 8.6% from 9.3% in April.

Weak June data presage a steep slowdown in Q2 and prompt further cuts in growth outlook for this year.  While unemployment remained low at 2.3%, trade data for June do not augur well for output.  According to revised numbers, the trade deficit dropped to US$ 371 million, the lowest deficit since April 2000.  Both, exports and imports experienced significant slowdowns.  Exports registered the second consecutive decline (-4.5% year-over-year, both in May and June) amid weaker maquiladora exports.  Additionally, the slowdown of consumer good imports to barely more than 7%, after an average annual growth rate of 32% in May, indicates a pronounced spill-over of the weaker external sector to domestic demand at the end of the second quarter.  As a result, panellists have pared their forecasts for June GDP and second quarter growth forecasts have dropped as well.  The stronger than expected slump is also seen to carry over into the remainder of the year, as forecasts were slashed 0.1 percentage points and 0.2 percentage points for the last two quarters this year.  Consequently, GDP growth in 2001 is expected down 0.3 percentage points from last month’s forecast.  According to panellists, investment will bear the brunt of the adjustment to lower demand from the United States.  Consumption, on the other hand, is seen to withstand the slowdown somewhat better.  As uncertainty over U.S. economic recovery persists, panellists have maintained their economic growth outlook for next year unchanged.

Public sector revenue remains below budget amid weaker oil revenues, triggering fiscal cuts.  In June, budgeted income increased 7.6% in real terms amid higher tax receipts, which offset weaker oil revenues and import taxes.  In the first half this year, the public sector registered an overall surplus of 13.2 billion Pesos (US$ 1.4 billion), which is 43.3% in real terms below the same period last year.  Public sector revenues increased 2.2% in real terms over the same period last year. However, revenues were 10.2 billion pesos (US$ 1.1 billion) below the official government projections, as higher oil and natural gas prices were more than compensated by the strong Peso, higher oil and petrochemical imports and lower domestic oil sales volume.

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