Mexico - Economic Briefing May 2003

Economy Battered by Weak U.S. Economy and Lower Oil Price

The outlook for the Mexican economy continues to worsen. Next to mounting uncertainty over the robustness of the U.S. economy, the country’s economy is battered by a tight monetary policy, as the Central Bank is eager to stem increasing inflationary expectations in order to meet its long-set monetary policy target. Finally, the declining oil price limits the government’s ability to bolster the economy with additional fiscal spending, since oil constitutes an important source of income for the government.

Economy expands at moderate pace in February in line with expectations
In February, the economy advanced 2.0% over the same month last year, according to the global indicator for economic activity (IGAE, Indicador Global de la Actividad Económica). The February reading was slightly below January’s 2.1% annual growth rate but came in a notch ahead of the Consensus, which last month had anticipated 1.8% growth. Taking into account seasonal factors, the reading was better than indicated by the annual data. According to seasonally adjusted figures, the economy expanded 0.46% in February over the previous month (January -0.17%), equivalent to an annual growth rate exceeding 5%. Services expanded by 3.0% in February over the same month last year, virtually unchanged from 2.9% annual growth registered in the first month of the year. Agriculture reverted from a 1.7% expansion in January to a 3.4% decline in February, amid lower output in fruits and vegetables.

Industry adds speed over January despite slowdown in maquiladoras
Performance in the industrial sector has improved notably. Industrial output grew 1.2% in February over the same month last year. The February figure was triple the 0.3% expansion registered in January, as growth in three of the four sub-sectors that comprise industry accelerated compared to January. Construction grew by 4.9% year-on-year, following on 3.7% growth in January and the electricity, gas and water sector added 3.3% after 1.8% growth in January. The manufacturing industry reverted from a 0.4% contraction to a 0.5% expansion in February, even though the all-important maquiladora industry (in-bond manufacturing) lost dynamism, expanding a mere 0.7% in the second month of the year, following on 1.8% growth in the previous two months. Mining was the only sector that deteriorated compared to January, as a 0.1% expansion in January reverted into a contraction of the same magnitude in February.

Consumer confidence rises in April, according to new indicator
On 2 May, the National Statistical Institute (INEGI) presented its new consumer confidence indicator (ICC, Índice de Confianza del Consumidor). The indicator is elaborated jointly with the Central Bank based on data from the National Consumer Confidence Survey (ENCO, Encuesta Nacional Sobre la Confianza del Consumidor), which is conducted in 48 cities throughout the country. Five sub-indices comprise the indicator, two of which refer to the current and expected economic situation of the households surveyed. Two other indicators reflect the current and expected economic situation of the country and a fifth indicator measures consumers’ intentions regarding potential purchases of durable consumer goods. With January 2003 as a base (January=100), the index reached a value of 95.8 points in April, which is 0.4% below the level registered in April 2002 but represents a strong improvement over the 90.5 level in March this year and thus reverts a trend of falling consumer confidence observed since December last year. Consumers’ attitude towards purchasing durable consumer goods constituted the main driver behind the April improvement (+11.1% over March compared to 5.9% for the general index), followed by increased optimism over the country economic outlook (+8.5% over March).

Outlook for this year lowered yet again
Consensus Forecast panellists do not share the increased optimism of the general public and have once again lowered their outlook for the full year a notch since last month, which is below the current 2.4% Central Bank forecast. On 29 April, the Central Bank had announced that its previous forecast of 3.0% growth seemed overly optimistic given the subdued outlook of the global economy. Panellists believe the economy to have expanded by 2.7% in the first quarter over the same period last year, in line with the latest government estimate from 6 May. According to the Consensus, growth will taper off in the second quarter before accelerating again in the third and fourth quarter.