Economic Briefing November  2001

The Mexican economy is headed towards recession in the second half this year as the terrorist attacks have further exacerbated the economic slowdown, which was already in full swing prior to the September events. Meanwhile, the economic slump has eroded tax revenues, triggering yet another round of public sector spending cuts. The spending cuts reinforce the need for fiscal reform, which continues to be hotly debated in opposition-dominated Congress. Although the government remains optimistic to garner the required support for the reform bill, the current budget proposal does not assume any additional revenue to be generated by the new legislation. 

Economic activity plunges in August and virtually all indicators point downward

With the full immediate impact of the terrorist attacks still to show up in economic data releases, the Mexican economy has continued its slide induced by the weakening US economy, as evidenced by indicators released for the August/September period.  The August global economic activity indicator fell 1.6% over the same month last year, following a 1.0% contraction in July, continuing the downward trend observed since March.  The weak industrial sector, which is rapidly adjusting to lower demand from the US, led the decline, registering a 5.4% decline over August last year, which was substantially weaker than the 3.3% contraction in July.  Services also dipped into negative territory (-0.3% year-over-year) compared to meagre growth in July (+0.2% yoy).  Agriculture, on the other hand, remained unaffected by the general trend, expanding a healthy 10.5%.  With the exception of electricity, gas and water, all industrial sub-sectors have declined considerably, in particular manufacturing (-6.3% yoy).  Activity in the maquiladora industry dropped a staggering 18.1% over August 2000, the deepest contraction since the Central Bank has begun to monitor the sector’s indicators.  The plunge in the maquiladora industry is particularly distressing and emphasizes the dire state of the Mexican economy, since the sector had been the key engine behind the rapid expansion of the Mexican economy in the past decade.  In fact, even in 1995, when the industrial sector contracted sharply in the wake of the Peso crisis, the maquiladora industry still exhibited double-digit growth rates, thus helping mitigate a more pronounced crisis.  The steep decline in economic activity and the uncertainties related to the global outlook have also prompted businesses to scale back their investment.  In August, gross fixed investment dropped a whopping 10.3% year-over-year, the biggest decline since the end of the Peso crisis.

September data confirm negative trend and prompt severe downward revisions to 2002 economic outlook

September data confirm the downward trend observed in August.  While unemployment increased only 0.17 percentage points from August to 2.49% in September, trade data point towards a very weak third quarter.  Exports dropped 10.5% over the same month last year accompanied by weak imports, which were down 11.2%.  In the third quarter, both exports and imports declined 9.1%, representing the weakest quarter since 1986.  As a result of the dismal September reports, Consensus Forecast panellists have adjusted their expectations for third and fourth quarter GDP growth downward another 0.2 percentage points.  Moreover, the recession is now seen to carry over into early next year, albeit at a much more moderate pace in the first quarter.  Subsequently, the Mexican economy is expected to recover smoothly.  Nevertheless, the process of downward revisions to next year’s growth outlook still seems to be in full swing and the growth rate expected for 2002 represents a 0.7 percentage point cut compared to last month’s forecast.

Inflation drops as September price surge proved temporary

In October, consumer prices increased 0.45%, lowering annual headline inflation from 6.1% in September to 5.9%.  The October price increase was less than half the rate observed in September and was in line with expectations, which had been lowered to reflect benign mid-month data released earlier.  The main drivers behind the October price hikes were some fresh food and vegetable items as well as electricity and fuels.  As a result, the core inflation index, which excludes these more volatile items, rose at an even lower rate (+0.28%) prompting a 0.16 percentage point decline in the annual rate to 5.8%.  Even though a declining inflation trend has been observed throughout the year, the September spike prompted panellists to hike their year-end inflation forecast a notch.  In addition, the Consensus Forecast participants remain sceptical about the Central Bank’s ability to further lower inflation markedly towards its 3% target in 2003.  Despite the subdued demand expected in the coming year, which should keep inflationary pressures at bay, panellists see inflation dropping moderately at the end of 2002, which is unchanged from last month’s forecast.

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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