Mexico - Economic Briefing December 2002

Central Bank Tightens Policy Again to Contain Inflationary Expectations

The more pessimistic assessment of the US economy continues to weigh on the outlook for Mexico. In addition, the Central Bank has tightened its policy once again to stem inflationary pressures. Inflationary expectations continue to rise and thus threaten to undermine the monetary authorities’ long-time proclaimed objective of lowering inflation to international levels by the end of next year.

Economic activity in September significantly below expectations, raising concerns about recovery
In September, the National Statistical Institute (INEGI) reported that the monthly indicator for economic activity (IGAE, Indicador Global de la Actividad Económica) rose 1.5% in real terms compared with the same month last year. The actual reading was a full percentage point below market expectations. Agriculture dropped by 4.7%, industry declined 0.6% and services grew 2.9% over the same month last year. While the economy advanced over the same month in 2001, it actually declined 0.15% over the preceding month, according to seasonally adjusted data. The month-on-month decline ends a string of four consecutive months of expansion and fuels concerns that the incipient recovery has become choked off before it could take a firmer grip over the Mexican economy.

Economic growth slows down in third quarter
The lower-than-expected reading of September economic activity also left third quarter growth below the anticipated growth rate. According to preliminary numbers, gross domestic product (GDP) expanded by 1.8% in the third quarter compared to the same period last year, which represents a slowdown over the 2.1% annual growth rate recorded for the second quarter. Seasonally adjusted data also indicate lesser dynamism in the Mexican economy, as the quarter-on-quarter growth rate dropped from 1.33% in the second quarter to 0.99% in the third.

Services lead growth and improve over second quarter
Services led growth, expanding at a healthy 2.6% pace over the third quarter last year, which represents an improvement over the 2.2% growth observed in the second quarter. Within services, the financial sector led growth. Nevertheless, the 3.9% annual growth in financial services constituted a slowdown compared to the second quarter, when output expanded at an even quicker 4.7% pace. The pickup in services growth is mainly due to commerce restaurants and hotels, which added 1.9% over the third quarter last year (Q2: +0.4% year-on-year). Transport, storage and communications also experienced healthy growth, adding 3.9% after a 2.9% annual expansion in the second quarter. According to INEGI, the subsector profited from healthier activity in telephone and satellite communication. The agriculture sector also gained speed, growing by 1.6% in the third quarter following 1.1% growth in the second.

Industry slumps amid slowdown in construction and manufacturing
The only sector that experienced a slowdown compared to the performance in the second quarter was industry. As a whole, the sector, which throughout most of the second part of the 1990s constituted the main growth engine for the Mexican economy, often expanding at double-digit levels, grew by a meagre 0.6% over the same quarter last year. The figure was well below expectations and less than a quarter of the 2.5% annual growth rate registered in the second quarter. The slowdown was most pronounced in the construction industry, where growth dropped 3.4 percentage points from 5.0% in the second quarter to just 1.6% in the third. The manufacturing industry also experienced a major slump, as the rate of expansion decelerated from 2.1% in the second quarter to barely positive 0.2% in the third.

Outlook for this year lowered
The first data releases for the fourth quarter are quite promising. In October, open unemployment dropped to 2.7% from 3.1% in September. However, the disappointing performance of the economy in the third quarter has prompted the Consensus Forecast panellists to lower their projections for the final quarter of the year by 0.4 percentage points to 3.0%, in line with the current government expectation of 3.0% growth. As a result, the growth forecast for the full year was also lowered 0.2 percentage points over last month to the current 1.3%. The outlook for 2003 has experienced a downgrade of equal magnitude to 3.4%, as the key engine for Mexican growth, namely demand for manufactures from the U.S. economy is seen to develop along a more moderate trajectory than expected earlier. Moreover, rising inflationary pressures require a firmer monetary policy stance.



 

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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