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The economy is at crossroads: either the
tentative recovery observed in last months gains speed or the slowdown
anticipated in the United States towards the end of the year sends the
economy back into a slump. Meanwhile, the Fox administration, adamant to
maintain its reputation of fiscal prudence, has presented a conservative
budget to Congress. The budget proposal is likely to face protracted debates
in Congress, where President Fox lacks a majority, and may be altered
significantly by the opposition. |
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August data indicate slowdown from tentative recovery
In August, the monthly indicator for economic activity (IGAE, Indicador
Global de la Actividad Económica) rose 1.3% in real terms compared to the
same month last year. The result was half the growth rate observed in July
and also remained well below market expectations of 2.0%. Moreover,
according to seasonally adjusted data, August marked the first month with
declining activity (-0.15% over July) since March this year and thus
raises concerns over the robustness of the Mexican recovery. The dismal
reading was in part prompted by a sluggish external sector. While exports
still advanced compared to the same month last year, growth came in at a
much lower rate than observed in July. The domestic side of the economy
also slumped, as indicated by softer services, which increased by 2.0%
year-on-year, following on 2.7% growth in July. Gross fixed investment
also dropped in August after only a brief respite in July, which had
raised hopes that businesses would augment their spending in anticipation
of an economic rebound. The other sectors also deteriorated compared to
July. Agriculture declined 2.3% after a 9.5% expansion in July and
industry increased just 0.7% after adding 1.9% in July. Nevertheless, the
positive reading for industrial production is encouraging, since it marks
the second consecutive month of growth and, thus, remains in the pattern
of a tentative recovery, which can be observed since April this year. In
particular, the development of the maquiladora (in-bond manufacturing)
industry raises hopes that an upswing in demand from the United States for
Mexican manufactures will stimulate growth in the country. The sector
still registered a contraction but the 3.2% decline in August represents a
notable improvement over the double-digit contractions observed through
May, which lasted for almost a year.
Recent data provide ambiguous picture of Mexican economy
August retail sales data (+0.6% yoy after +2.1% in July) confirm the
current state of the Mexican economy . The August slowdown over the
previous month raises doubts over the stability of the US-led recovery.
Nevertheless, growth so far remains in positive territory and thus leaves
room for hopes that the rebound from last year’s recession will take a
firmer grip on the Mexican economy. September unemployment casts a shadow
over increased optimism, as the rate deteriorated sharply from the 2.8%
registered in August to 3.1% in September. However, unemployment data have
proven erratic in the past and are a poor indicator for future economic
development. The National Statistical Institute’s (INEGI) set of
coincident and leading indicators is more liable to anticipate future
economic developments but the August indicators – released on 1 November –
corroborate the uncertain state of the Mexican economy. The coincident
indicator, which tracks current economic development declined over the
previous month, whereas the leading indicator, which anticipates the
future trajectory of the economy, ticked upwards over July in seasonally
adjusted terms. The improvement was due to positive developments at the
Mexican Stock Exchange, real interest rates, higher oil prices and
increases in the real exchange rate index.
Less-than-robust recovery in the United States overshadows economic
outlook
Consensus Forecast panellists are upbeat about economic activity in
September and expect a 2.5% expansion over the same month last year. This
would put third quarter growth at 2.3%, just slightly above the current
government estimate of “around 2.0%”. For the final quarter, panellists
still expect a notable acceleration in economic activity. However, the
current forecast is 0.1 percentage point below last month’s projection. As
a consequence, the Consensus forecast for the full-year 2002 was lowered a
notch over last month, the first downward revision in months. The current
forecast is just marginally above the recently adjusted expectations of
the Central Bank., which has lowered its forecast to 1.3%, amid a sluggish
external environment and the lack of political agreement for structural
reforms. The government is more optimistic about the final quarter and has
confirmed its 1.7% growth forecast for the full year in early November.
Consensus Forecast panellists are becoming increasingly sceptical about a
cyclical rebound in 2003, in line with expectations that the growth
prospects for the United States are now less favourable than earlier in
the year. The outlook for 2003 was lowered another 0.3 percentage points
since last month but remains well above the 3.0% expected by the Central
Bank and the government.
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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