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.

Economic activity slumps stronger than expected in June …  In June, the global economic activity indicator contracted 0.6% in real terms compared to the same month last year.  This follows the May contraction, which was revised downward from 0.4% to 0.7%, and thus marks the second consecutive monthly decline.  According to seasonally adjusted data, economic activity added 0.02% over May 2001.  A 3.9% contraction in industry spearheaded the June contraction, which represented the steepest decline since December 1995, when the economy was pulling out of the Peso Crisis.  The maquiladora industry experienced an even more pronounced downturn as activity in that sector dropped 4.2% over June 2000. The maquiladora industry is now showing the first signs of negative growth since the National Statistical Institute (INEGI) started publishing data for the sector in 1994.  Services also dipped slightly into negative territory (-0.2% year-over-year) amid weaker domestic and external commercial activity, whereas financial services continued to rise.

... prompting a second quarter GDP reading below forecasts with steep contractions in industry.  Owing to the weak economic activity in June, second quarter gross domestic product (GDP) data came in substantially lower than expected.  According to INEGI, GDP was flat in the second quarter over the same period last year, whereas the Consensus Forecast had expected a 0.9% expansion.  Even though authorities have not yet released data for global demand and supply, the June data for gross fixed investment reported by INEGI on 7 September suggest a very weak second quarter.  According to INEGI, gross fixed investment dropped a staggering 8.5% compared to June 2000.  This would leave the decline of investment in the second quarter at 5.5% over the same period last year, which represents the worst result since 1995.

Agriculture expanded 4.2% over the second quarter last year and thus was the only sector that showed an improvement over the first quarter.  A 6.9% decline in construction activity (-3.8% Q1) and a 3.4% drop in manufacturing output (-1.2% Q1) drove down industrial performance, which contracted 3.6%.  Mining dropped 3.2% over the second quarter last year, down from growth of 0.2% in the first quarter.  The only industrial sector with positive growth rates was the electricity, gas and water sector, which increased 1.6% and thus almost maintained the 2.0% growth registered in the first quarter. 

Slowdown in services growth and sluggish consumption raises concern about potential recession.  Services expanded by 1.4% in second quarter, less than half the rate observed in the first quarter and an unambiguous sign that the spill-over from the externally induced slowdown has taken hold of the domestic side of the economy.  A 0.6% decline in commercial activities, which was down from a still healthy 5.6% growth rate in the first quarter, raises concerns, since it evidences a quick erosion in consumption, despite low unemployment and significantly lower real interest rates.  So far, consumption had remained a strong backbone of the economy as demand from the United States for Mexican manufactures has been eroding for quite some time.  If the slide in consumption should continue, the Mexican economy is headed for an even steeper decline in the remainder of the year than anticipated earlier. 

Early data releases do not bode well for third quarter and panellists slash their growth forecasts yet again.  July data for unemployment and trade do not indicate a good start into the current quarter.  Even though unemployment rose only a mild 0.1 percentage point in July over June, both the 4.4% contraction in exports over July 2000 and the 3.5% slide in imports were disappointing and indicate that the adjustment to lower U.S. demand continues.  Therefore, panellists have further slashed their GDP forecasts for this year, despite the fact that the leading indicator for June, published by INEGI on 5 September, registered the third consecutive growth over the preceding month, indicating that the worst may be over.  On average, panellists expect GDP to contract 0.2% in the third quarter, and that growth will resume with a modest 1.6% in the fourth quarter.  For the whole year, the Consensus expects a GDP growth rate of just 0.9%, down a full percentage point compared to last month’s projection.  The current forecast is in line with recent remarks from Central Bank president Guillermo Ortiz, who in early September admitted that the economy is likely to grow less than 1%.  In addition to the cutbacks to this year’s economic performance, panellists also pared their outlook for the coming year by 0.4 percentage points to 4.0%, as the uncertainty over a strong rebound in the U.S. economy continues to overshadow economic prospects. 

Note:  The above text is an abridged version of the LatinFocus Consensus Forecast briefing on Mexico.  For more details please click here.

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