|
Economy declines even faster than
expected in third quarter
On 15 November, the Mexican Finance Ministry reported
that Gross Domestic Product (GDP) contracted 1.6% over the same quarter
last year. The contraction came in slightly below the 1.4% decline
analysts had expected, according to last month’s forecast and represents
the first annual contraction since the end of the 1995.
Lower US demand prompts harsh contraction in manufacturing industry
The sharp
slowdown Mexico is currently experiencing is largely due to the weak US
economy. With demand for Mexican manufactures plummeting, the industrial
sector is taking the brunt of the current slowdown. In the third quarter
the sector was down 4.7%, following a 3.6% contraction registered in the
second quarter. The deterioration was entirely due to the manufacturing
industry, whereas other industrial sub-sectors -- mining, construction and
electricity, gas and water -- improved compared to their second quarter
performance.
The
manufacturing industry declined by 5.5% over the third quarter last year,
following a 3.4% contraction in the second quarter. Declining US demand
for Mexican manufactured goods is even more visible in the maquiladora
industry (in-bond manufacturing), which dropped a staggering 11.9% in
September over the same month in 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 Mexican economic expansion of 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.
Service sector trails off as massive
layoffs lower income
The lower dynamism of the industrial sector has now
also extended to the services sector, which accounts for more than half of
the Mexican GDP. Services, so far, had remained resistant to the economic
slowdown. However, massive layoffs in the manufacturing industry have
eroded consumer demand and thus weakened the backbone of the Mexican
economy. As a result, the services sector was down 0.4% in the third
quarter, whereas in the second quarter it still registered an annual
growth rate of 1.4%.
The deterioration was most pronounced in the sectors
related to trade and leisure. Commerce, restaurants and hotels dropped
4.7% over the third quarter 2000 (Q2: -0.6%) and growth in transport and
communications decelerated from 3.9% in the second quarter to 1.0%.
Financial services industry boosted
by lower interest rate environment
Financial
services, on the other hand, increased at a faster rate than in the second
quarter as the lower and more stable interest rate environment has revived
demand for consumer and business loans. The strong Peso has assisted the
Central Bank in lowering inflation below the official 6% target rate for
this year and interest rates have followed suit, driven by the aggressive
rate cutting in the United States.
At the weekly
auction on 4 December, the rate for the 28-day Cetes dropped to 6.18%, the
lowest level since those securities were first sold in 1982. This has
prompted banks to offer fixed-rate consumer loans for the first time in
almost a decade, boosting growth in the financial services industry in
spite of the general economic downturn.
Investment
plummets as businesses adjust to lower demand
The release of
global demand and supply data is still pending. Preliminary data indicate,
however, that investment led the decline in the third quarter followed by
a weak external sector. According to LatinFocus calculations, gross fixed
investment dropped at an annual rate of 9.0% in the third quarter,
exhibiting a clearly accelerating trend toward the end of the period,
which foreshadows a further deterioration in the final quarter of the year.
In fact, panellists estimate a 9.2% decline in the fourth quarter and an
annual decline of 5.8%.
Outlook lowered further but optimism
over short-term recovery prevails
The outlook
for a much milder recession compared to previous crises, such as the
1994/1995 Peso crisis, is good. Mexico’s macroeconomic framework is much
more solid than it was six years ago:
First, the
Peso is floating freely, which helps avert the emergence of any structural
imbalance in the external accounts experienced in past crises.
Second,
monetary policy has been strict and the Mexican Central Bank has built up
a strong credibility by meeting its inflation targets in the past years.
Finally, the
government has also stuck to fiscal discipline, even as the current slump
has eroded tax revenues. So far, the Fox administration has implemented
three spending cuts this year and is expected to only slightly overshoot
the annual fiscal deficit target.
Therefore,
panelists see only a mild downturn in economic activity of 0.2% this year,
with the bottom being reached in the third and fourth quarter. The fourth
quarter is expected to be a repetition of the 1.6% year-on-year
contraction in the third quarter followed by a much more moderate 0.7%
contraction in Q1 2002.
Panellists
remain upbeat about the prospects in 2002 and expect recovery to kick in
as soon as the second quarter (+0.8% year-on-year). Annual growth is seen
0.4 percentage points below 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.
|
Economic Forecasts
from Top Financial Institutions. Order
here!