Mexico - Economic Briefing January 2003

Outlook Limited by U.S. Economy and Monetary Tightening

Mexico is set to recover this year from anaemic growth in 2002. However, despite the enormous policy stimulus in the United States, the northern neighbour will continue to expand below potential output growth, weighing down on the outlook for the Mexican economy. In addition, the country’s monetary authorities are fighting rising inflationary expectations, which threaten to jeopardise the long-term objective of lowering inflation to international levels in 2003.

External sector contributes positively to third quarter growth, as consumption slacks and investment drops back into negative territory
In the third quarter of 2002, final demand for goods and services increased by 2.9% compared to the same period the year before. The reading followed on the earlier release of GDP growth of 1.8% and was only slightly ahead of market expectations. In the preceding quarter, final demand had increased at an annual rate of 2.5%. The improvement observed in the third quarter was mainly attributable to the external sector and a pickup in inventories, as exports increased at a 6.7% pace compared to the same period in 2001, twice the rate observed in the second quarter. Consumption and investment activity, on the other hand, decelerated compared to the second quarter. Total consumption growth slowed from 2.3% in Q2 to 1.7% in the third quarter. Since government consumption improved somewhat over the second quarter performance, the decline was propelled by slacker private consumption. While in line with last month’s expectations, investment performance was very disappointing. After only one quarter of growth, gross fixed investment once again slid into negative territory with a 0.8% decline over the third quarter 2001, compared to 2.7% growth in the second quarter. According to the Consensus, both, investment and consumption are likely to have picked up in the final quarter of 2002. Nevertheless, for the full year, consumption growth rose just 1.4% and investment 1.2%. This year, domestic demand should recover substantially, with consumption expanding by 3.8% and an investment at a healthy 7.1%.

Economy develops favourably in October
In October, the monthly indicator for economic activity (IGAE, Indicador Global de la Actividad Económica) rose 2.6% in real terms compared with the same month last year. According to seasonally adjusted data, the economy added 0.65% over the preceding month. The October reading represents a marked acceleration in growth compared to the 1.5% growth registered in September. Agriculture expanded 3.8% (September: -4.7% year-on-year) and services grew 3.2% (September: +2.9% yoy). Furthermore, in October, industrial output expanded at an annual rate of 1.3% in real terms, as all of the four major sub-sectors experienced a pickup in activity. The expansion follows on a 0.6% decline in September and was even more pronounced if seasonal factors are taken into account. According to seasonally adjusted data, the industrial sector added 0.81% over the preceding month. Mining exhibited the strongest upward swing of the four industrial subsectors, adding 4.9% on an annual basis after a 1.2% decline in September. The improvement was driven by a rise in the oil industry (+7.4% year-on-year), whereas non-oil mining expanded more moderately (+1.6% yoy). The manufacturing industry expanded by 0.9%, as the domestic industry grew by 1.3%, which was partially offset by a 3.2% decline in the maquiladora activity (September: -1.0%). Finally, construction grew 1.1% (September: -0.5%) and the electricity, gas and water sector added 3.9% compared to October 2001 (September: 3.7%). According to the Consensus, activity in the industrial sector increased by only 0.9% in 2002. While this actually represents an improvement compared to the 3.5% contraction in 2001, the outcome contrasts with the dynamism of the sector throughout the second half of the 1990s, when industry constituted the main growth engine in the post-Peso-crisis recovery. The sector had profited enormously from the inception of NAFTA (North American Free Trade Agreement), which had prompted many U.S. and Canadian firms to relocate their production facilities to Mexico, in order to take advantage of cheap labour. In the past years, Mexico’s role as a production base has become challenged by increased competition from Asian countries, in particular China. With the increasing integration of China into the world economy, this competition will mount rather than diminish. Nevertheless, the Consensus is upbeat about the sector’s prospects. In 2003, industry should grow 3.8%, as demand for Mexican manufactures from the United States is likely to increase. In 2004, the sector is anticipated to return to trend growth, expanding at a healthy 6.1% pace.

Outlook lowered amid less propitious economic data and tighter monetary policy
In January, the Central Bank has lowered its estimate for 2002 growth to 1.1% from a previous estimate of 1.3%, a move that was mirrored by the Consensus. Consensus Forecast panellists also assess this year’s prospects more negatively than a month ago, as less than optimal readings in October and a tighter monetary policy have dampened the outlook. Consequently, panellists lowered the 2003 GDP growth outlook by 0.3 percentage points to 3.1%.