Mexico - Economic Briefing October 2002

Central Bank Tightens Policy to Achieve Inflation Target

The country is emerging from the first recession induced entirely by external factors. Consequently, the Mexican consumer, who in previous crises lagged behind the overall economic recovery, due to wiped out purchasing power, is now leading the pack. Meanwhile, the Central Bank is tightening its policy at an unusually early moment in the business cycle to stem inflationary expectations, which threaten to undermine its long-time proclaimed objective of lowering inflation to international levels next year.

Demand increases stronger than expected in second quarter amid healthy consumption
Shortly after the release of the September edition of the Consensus Forecast, the National Statistical Institute (INEGI) released second quarter supply and demand data . The release confirmed the 2.1% increase in GDP and reported that aggregate demand grew 2.5% compared to the same period last year. The reading was ahead of expectations, which had seen growth at 2.1%, and represented a substantial rebound from the 2.5% contraction registered in the first quarter. Private consumption and investment were the key drivers behind the first quarter improvement. Private consumption expanded at an annual rate of 2.9%, following on a 1.5% contraction in Q1. In particular durable consumer goods expanded at an unexpectedly fast clip (+9.1% yoy), as Mexicans hiked spending on cars, furniture and electrical appliances. Government consumption, on the other hand, deteriorated in the second quarter, contracting 1.6% after a 1.1% contraction in Q1, as the government had to cut spending due to lower oil revenues.

Investment emerges from recession
Gross fixed investment added 2.7% and thus emerged from a string of four consecutive quarters of declining activity. In the April to June period, businesses resumed spending on domestic machinery and equipment and construction, which helped drive the investment recovery. Countering the positive development were inventories, which declined again (down 9.1% year-on-year) following only one quarter of restocking (Q1: +31.1% yoy) and thus resumed the negative inventory trend observed since early 2001. Exports bounced back into positive territory, expanding 3.3% over Q2 2001, following four consecutive quarters of negative growth. Similarly, imports grew 3.6%, following three declining quarters. Seasonal patterns - Easter holidays were in the second quarter last year but in the first this year - indicate that the development is less positive than suggested by the year-on-year comparison. However, the seasonal adjusted data provided by INEGI point towards a strong pickup in domestic demand (+2.2% over the preceding quarter) and private consumption (+2.8% qoq) as well as investment (+3.8% qoq). Consensus Forecast panellists believe that the positive consumption and investment trend will persist through the end of the year, with growth rates reaching 1.6% and 1.8% respectively.

Recent data bode well for third quarter
The third quarter seemingly commenced positively. In July, INEGI reported that the monthly indicator for economic activity (IGAE, Indicador Global de la Actividad Económica) rose 2.7% in real terms compared with the same month last year. Agriculture expanded by 9.5%, industry added 1.9% and services grew 2.7% over the same month last year. While the economy barely advanced over the preceding month, according to seasonally adjusted data, the July reading is nevertheless positive, as it represents the fourth consecutive expansion, indicating that the recovery remains underway. Unemployment data also suggest a positive development, with the official rate dropping from 2.9% in July to 2.8% in August, although it should be noted that this indicator sometimes shows erratic movements not correlated with the rest of the economy. More important than domestic factors for the path of the Mexican economy is the trajectory of the US economy. Despite an upward revision to second quarter GDP growth figures, most analysts view the US economy increasingly pessimistic. Consequently, participants lowered the forecast for next year’s GDP growth by 0.4 percentage points over last month, while the forecast for this year remained unchanged.





 

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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