Mexico - Economic Briefing January 2002

Economy Continues to Contract but First Signs of Stabilisation are Unfolding

While the Mexican economy continues to contract, first signs are emerging that the worst may already have passed. Moreover, the US economy is also sending incipient encouraging signals. If these provisional indications prove to be correct, the Mexican economy would have experienced one of the mildest recession in decades. Meanwhile, the subdued demand fed through to a favourable monetary environment last year as inflation dropped below the Central Bank’s target.

Investment and exports lead third quarter decline

According to third quarter global demand and supply data, the economic slump has spread across all sectors.  Investment led the 3.2% decline in global demand (Q2: +0.4% year-on-year), followed by a weak external sector.  Gross fixed investment dropped at an annual rate of 9.1% in the third quarter, following the 5.5% contraction in the second quarter, which foreshadows a further deterioration in the final quarter of the year.  In fact, panellists estimate a 9.5% investment decline in the fourth quarter and an annual decline of 5.9%.  Exports dropped 8.2% in the third quarter compared to the same period last year, following the only slightly negative second quarter.  Consumption remained in positive territory in the third quarter but the 1.0% growth rate was just a third of the growth observed in the second quarter.  

Some signs of stabilizing economic growth in fourth quarter

More recent data indicate that the deterioration in economic performance is slowly coming to an end.  Economic activity declined by 1.7% in October better than the 2.3% contraction expected by the panelists and an improvement from the 2.5% decline registered in September.  In November, industrial production declined 3.7%, also slightly better than expectations of 3.9% and substantially better than the 4.6% contraction in the preceding month.  In seasonally adjusted terms, industrial production actually picked up over October.  As a result, the continuous downward revision to GDP forecasts finally seems to be drawing to an end.  The expected growth rate for 2001 was maintained and the forecast for 2002 was lowered just a notch. 

Inflation drops to historic low as price pressures remain absent in holiday season

Consumer prices increased 0.14 in December.  Because of the subdued price movements in the last month of the year, annual headline inflation dropped from 5.4% in November to 4.4% in December.  Both, the monthly increase and the annual rate are the lowest rates registered in a December since 1968.  Lower gas prices as well as downside pressures on the prices of some important food items, prompted the more benign inflation reading .  As a result, the core inflation index, which excludes the more volatile items showed a slightly higher increase of 0.25% in December.  Nevertheless, annual core inflation dropped from 5.4% in November to 5.1% in December.  While a number of factors out of the Central Bank’s responsibilities assisted the monetary authority in its pledge to lower inflation last year, the delivery on its targets – in the past years the Central Bank always remained below the official inflation target -- should serve to bolster Central Bank credibility.   Nevertheless, the market remains sceptical that the Central Bank will deliver its short-term 4.5% target by the end of 2002 even though inflationary pressures resulting from the tax reform should be virtually non-existent.   

Peso strength – no contagion from Argentina

The Peso finished the year at 9.16 versus the US$, which represents a nominal appreciation of 5.3%.  This makes the Mexican Peso the strongest performing currency in Latin America in 2001 and one of the strongest currencies in the world against the US$.  The Peso strength is even more surprising, considering the uncertainties related to Argentina, which had been lingering throughout most of the second half of the year.  However, the close ties with the United States seem to have shielded Mexico from contagion and the Peso remained firm even following the default and devaluation announcement in Argentina.  Consensus Forecast panellists do not foresee another year of nominal appreciation and anticipate the Peso to close this year at a level, which is equivalent to a nominal depreciation.

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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