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Economy expands below expectations in March
In March, the economy expanded by 2.7% over the same month last year,
according to the global indicator for economic activity (IGAE, Indicador
Global de la Actividad Económica). The actual reading was well below last
month’s Consensus Forecast, which anticipated an expansion of 3.8%
Furthermore, even though the year-on-year rate exceeded the 2.0% recorded
for February, the improvement was due to seasonal factors. According to
seasonally adjusted data, the economy contracted 0.45% over the preceding
month compared to an increase of the same magnitude in February.
Agriculture declined at an annual rate of 0.7% in March (February: -3.4%
year-on-year), industry expanded 3.8% (Feb: +1.2% yoy) and services added
2.6% (Feb: +3.0%).
First quarter data disappoints
Owing to the dismal March reading, first quarter GDP growth also came in
below expectations, as the economy expanded only 2.3% over the same period
last year below market expectations of 2.7%. This was better than the 1.9%
observed in the last quarter 2002. However, just as in March, seasonal
factors inflated the first quarter reading. Since Easter was in the first
quarter last year but in the second quarter this year, the first quarter
2003 had three working days more than in 2002. Hence, seasonally adjusted
data, which eliminate this effect, show a contraction of 0.49% over the
preceding quarter. In combination with the slightly negative fourth
quarter (-0.03% quarter-on-quarter in seasonally adjusted terms), the
Mexican economy has now contracted for two consecutive quarters, following
only on three quarters of growth last year.
Economy fails to recover amid weak U.S. demand …
The reason for the current economic recession is Mexico’s heavy dependence
on the U.S. economy, in particular in manufacturing. Since the inception
of the North American Free Trade Agreement (NAFTA) in 1994, the Mexican
economy experienced a massive export boost, propelled by the installation
of in bond manufacturing facilities along the border, the so-called
maquiladora industry. As a result, the importance of exports has more than
doubled in the Mexican economy and exports now account for more than a
third of total GDP, with close to 90% directed to the United States.
Therefore, the Mexican economy has only a limited potential for a rebound
as long as the demand for manufactured goods remains subdued in the United
States.
… prompting a slump in manufacturing
The impact of the U.S. slump is also visible in a sectoral breakdown of
first quarter GDP data, where manufacturing constituted the second slowest
growing sector (+0.9% year-on-year) following agriculture, which dropped
0.2% amid a poor harvest. Construction constituted the fastest growing
sector, up 5.9% over the first quarter 2002. The other two constituents of
industry – mining and electricity, gas and water – grew 1.3% and 3.0%
respectively. As a result, the industrial sector as a whole saw activity
increase by 1.8% over the first quarter 2002, an improvement when compared
to 0.9% growth in previous quarter. Output in services, on the other hand,
slowed from 3.1% in the final quarter last year to 2.8% in the first. The
main reason behind this slowdown was slower growth of commerce,
restaurants and hotels. The sector expanded by just 1.6%, less than half
the 3.3% growth registered in the fourth quarter, as a slowdown in tourism
weighed on activity levels in hotels and restaurants.
Outlook continues to deteriorate as US economic prospects clouded
With only mixed signs emerging from the U.S. economy, the immediate
outlook for the Mexican economy is subdued. Consensus Forecast panellists
expect the economy to have expanded by just 0.8% in April over the same
month last year. The low reading is partly due to the above-mentioned
Easter effect and will affect second quarter growth, which is seen at just
1.6% by Consensus participants. However, the economic situation is not as
hopeless as it appears. Consumer confidence rose for the second
consecutive month in May, from 95.8 in April to 98.9, according to the new
consumer confidence indicator (ICC, Índice de Confianza del Consumidor,
for details about the composition see the May edition of the LatinFocus
Consensus Forecast). Moreover, a more propitious interest rate environment
should help foster increased investment activity and could help to
stimulate domestic consumption. Consequently, amid the chances of an
accelerating U.S. economy towards the end of the year, growth should
accelerate to 2.8% in the second half. For the full year, Consensus
Forecast panellists have lowered their forecast yet another 0.2 percentage
points since last month. The forecast is now below the current Central
Bank projection, which was recently lowered from 3.0% to 2.4% and may be
lowered again according to an announcement made by monetary authorities in
early June. The government, on the other hand, confirmed its more
optimistic 3.0% estimate as recently as 4 June. The government’s
reluctance to admit to the possibility of lower GDP growth this year, may
also be motivated by political factors ahead of the 6 July mid-term
elections for the lower house of the national legislature and several
governorships |
