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Outlook remains upbeat despite first quarter slump
The first quarter reading dashes hopes that the recovery, which is already
well under way in the United States, would quickly spill over to Mexico.
Apparently, there is a larger than expected lag between a pick-up in US
domestic demand and an increase in Mexican production for that market.
Nevertheless, the signs for a rebound in Mexico remain in place despite
the dismal first quarter reading. Unemployment was unchanged from March in
seasonally adjusted terms and while the coincident indicator, which tracks
the economy’s current performance, turned negative in March, the leading
indicator, which anticipates the future development of the economy,
presages improvements. In addition, preliminary trade data for April
suggest that the economic rebound is finally translating into higher
demand for Mexican manufactures. Even when taking into account seasonal
factors, exports expanded both on a year-on-year and month-on-month basis.
Exports have not grown on an annual basis for a full year but will grow
3.3% this year, according to the Consensus. Owing to these more positive
signs, Consensus Forecast panellists have raised their forecast for the
current quarter a notch to 1.3% from 1.2% expected last month. And
forecasts for growth in the third and fourth quarter have also been lifted,
confirming the outlook of a sound economic recovery in the second half of
the year. Therefore, even in spite of the lower than expected economic
activity in the first quarter, the Consensus Forecast for the year as a
whole was lifted for the fourth time in a row. The 2003 GDP growth
projection was left unchanged.
Inflation
remains unchanged in May
In May, consumer prices increased 0.20%, in line with the Consensus. The
increase was half the rate observed in March and April this year and was
the lowest rate observed for May since 1972. Next to higher prices for
some food items, the price level was driven by increasing costs for
housing, partially compensated for by lower electricity tariffs. The
annual inflation rate remained virtually unchanged at 4.7%. Panellists
expect inflation to remain at this level through the end of the year,
which is unchanged from last month’s forecast.
Peso continues slide
The peso has continued the slide initiated after half a year of sustained
growth, which has terminated with the peso almost breaking through the 9
pesos per US$ threshold in early April. In May, the Mexican currency
depreciated 2.7% in nominal terms against the US$, following on a 4.0%
depreciation in April. In June, the peso weakened further closing at 9.74
to the US$ on 7 June. If the strain on the peso persists, the Central Bank
may feel obliged to tighten monetary policy once again to stem the
resulting inflationary pressures. At least hopes that monetary officials
would ease policy in the light of the benign inflationary environment seem
unrealistic now. Panellists have adjusted their forecasts accordingly and
are now forecasting a year-end exchange rate of 9.54 pesos to the US$.
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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