Mexico - Economic Briefing February 2002

Rating Agencies Upgrade Mexico Amid Solid Public Finances and Healthy Outlook

While it is still premature to call an end to the recession which took hold of the Mexican economy in the second half last year, first signs that the worst has passed and that the Mexican economy is poised for a recovery are emerging. The improved outlook and the proven track record of fiscal austerity have prompted the major rating agencies to upgrade Mexican sovereign credit ratings. Standard and Poor’s has finally awarded the long awaited investment grade, paving the way for an even more promising foundation for growth.

Economic activity declines again in November but reading surprises to the upside

While some indicators give rise to hopes that the worst for the Mexican economy may have passed already, the economy nevertheless remains in recession, according to the latest available data.  In November last year, the Mexican economy contracted by 1.4% over the same month in 2000.  The November reading was better than the Consensus Forecast, which anticipated a decline of 2.3% and also represents an improvement when compared to the contractions in September (-2.5% year-on year) and October (-1.7% yoy).  Moreover, according to seasonal adjusted figures, economic activity picked up 0.75% over October 2001. 

Industry leads the decline despite first signs of improvement

As in previous months, industry led the decline, dropping 3.7% from a year-ago, followed by services which contracted by 1.3% on lower wholesale and retail activities.  Meanwhile, the agricultural expanded a strong 12.0%.  Within industrial production, the maquiladora (in-bond manufacturing) industry accounted for the bulk of the decline, experiencing a staggering 18.8% annual drop in output as it suffers most from lower demand from the United States.  However, the speed at which the maquiladora industry is deteriorating is finally slowing (see chart) and while it is still too early to call for a rebound, the coming months may show a slight improvement compared to the double-digit contractions observed in the second half of 2001.  All other industrial subsectors actually experienced improvements compared to October readings.  The manufacturing industry declined 4.4% (October: -5.3%); Construction contracted by 3.8% (October: -4.9%); Electricity, gas and water grew by 2.1% (October: +1.2%) and mining added 1.9% compared to 1.4% growth in October. 

Forward looking indicators point upwards for the first time since January last year

Additional indicators corroborate the cautious optimism.  Unemployment, which had dropped significantly in November remained virtually unchanged in December.  And while gross fixed investment declined at an annual rate of 11.0% in November, seasonally adjusted data point towards an increase of 1.17% over October 2001. The forward looking indicators elaborated by the National Statistical Institute (INEGI) also turned out well.  The November coincident indicator registered a positive variation over the previous month for the first time since January 2001, as four of the six constituting components moved into positive territory.  In addition, the leading indicator, which anticipates the possible trajectory of the Mexican economy, also pointed upward – the first such movement in five months -- driven by positive developments in construction, stock markets, exchange rate markets and interest rates.

Still too early to call an end to the recession but forecasts are stabilizing

While remarks from the planning director at the Finance Ministry suggest that GDP probably contracted 1.2% in the fourth quarter (The government will release GDP figures for the fourth quarter and 2001 on 15 February), panellists maintain a more pessimistic attitude, expecting the contraction to have reached 1.4%.  Nevertheless, this month’s figure represents a 0.4 percentage point improvement over last month’s forecast for the final quarter last year and would imply that the bottom of the recession actually occurred in the third quarter, when the economy declined at an annual rate of 1.6%.  Despite these first signs of an incipient recovery it is still too early to announce an end to the recession.  As a result, panellists have not yet ceased to revise projections for Mexican economic growth this year downward.  However, forecasts are slowly stabilizing and the Consensus for 2002 dropped just a notch since last month. 

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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