Mexico - Economic Briefing April 2002

Rebound Will Kick In as Demand from US Picks Up

Increased optimism over an economic rebound in the United States is only slowly feeding through to the Mexican economy, which remains in recession. However, once the higher growth in the US prompts a broad-based restocking, the economy should rapidly gain steam in an ensuing export-led recovery. The domestic economy will be quick to follow as low unemployment and a benign credit environment will boost consumption.

Economic activity declines in fourth quarter 2001 amid weaker investment and exports
Shortly after the publication of the last Consensus Forecast, the Finance Ministry released annual and fourth quarter 2001 data for global demand and supply. Aggregated demand dropped by 1.1% in 2001, exhibiting a positive performance in the first half of the year but deteriorating sharply in the third (-3.4% year-on-year) and fourth quarter (-3.3% yoy). The contraction was driven by weaker investment and exports, while consumption remained in positive territory. In fact, total consumption expanded by 2.8% in 2001 and even registered a pickup towards the end of the year, as the annual growth rate increased from 1.1% in the third quarter to 1.8% in the fourth quarter. The improvement can be attributed to increased government consumption, which accelerated from a 3.5% contraction in the third to a 3.3% expansion in the fourth quarter. Meanwhile, private consumption expanded by 1.5% in the fourth quarter, virtually unchanged from the third quarter performance. Gross fixed investment declined 5.9% in 2001 with a clear deteriorating trend throughout the course of the year, which started with a slight expansion in the first quarter (+0.5% yoy) but worsened to a 9.1% contraction in the final quarter. Exports exhibited a similar pattern culminating in a 10.9% contraction in the final quarter of 2001. Imports experienced a lesser contraction but still shrank 7.7% in 2001, as domestic demand weakened over the year.

Services disappoint but industry shows notable signs of improvement
In January, the economy contracted 2.0% compared to the same month last year, as evidenced by the global indicator for economic activity (IGAE, Indicador Global de la Actividad Económica). The contraction was slightly worse than the 1.8% drop expected by Consensus Forecast panellists. The 1.6% decline in the services sector surprised on the downside, as it represented the weakest performance in the past year and a sharp deterioration when compared to the 0.9% contraction reported for December 2001. Lower wholesale and retail activity and weaker hotel services accounted for the services slump. The dismal performance in the services sector was partially compensated for by encouraging signs in industry, which felt the brunt of last year’s adjustment to lower US demand. In January, the industrial sector declined at an annual rate of 3.3%, which actually not only marks an improvement from the 3.6% contraction in December but represents the best monthly performance since March last year, shortly after the recessionary forces began take hold over industry. In February, the rate of industrial contraction dropped further to 3.4%. The maquiladora industry, however, continued to decline at double digit rates. In January, a 14.1% year-on-year contraction marked a significant improvement over the strong double digits declines of previous months, when the contraction came close to 20%. In February, however, the contraction rate reverted to 18.5% and thus again hovered around the highest rates registered during the current recession. On a positive note, the 4.2% year-on-year contraction in gross fixed investment in January marks a significant improvement over the 7.2% decline in December and represents the best monthly performance since April last year. In seasonally adjusted terms, the economy expanded 0.6% over the preceding month, which apart from November marked the best result in the past year.

Forecasts inch upward despite downside risks from global economy
More recent data corroborate the notion that the worst may be over. While generally lagging somewhat behind, the open unemployment rate fell to 2.7% in February from 3.0% in January. And the leading indicator for January, released on 2 April, also suggests that the Mexican economy is set for a recovery in the short term. However, the upside risks for the oil price originating from the current crisis in the Middle East, which threatens to thwart a global recovery, still loom over this year’s outlook. While Mexico stands to profit from higher oil prices as an oil exporter, the repercussions of a higher oil price via slower growth in the United States could outweigh the short-term benefits for Mexico. As a consequence, Consensus Forecast panellists have not yet raised their forecasts on a broad scale and the Consensus for now inched upward only 0.1 percentage points over last month. Nevertheless, the trend of forecasts is now clearly moving upwards as this month’s plus follows on an upgrade of the same order in March. Given the increased optimism over economic growth in the US, future revisions to forecasts are likely to be on the upside.


 

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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