Mexico - Economic Briefing September 2003

Still Disappointing But Outlook Stabilising

The Mexican economy continues to disappoint. However, the dismal second quarter seems to have marked the trough and forecasts, which have dropped for more than a year, are beginning to stabilise. Next to a favourable monetary setting, the Mexican economy should profit from rising demand in the U.S., where the recovery seems to be taking a firmer hold.

Economy slightly worse than expected in June
In June, economic activity expanded by 1.6% 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 above the zero growth recorded in May but was below the 1.7% to 1.9% range expected by last month’s Consensus panel. According to seasonally adjusted data, the economy expanded 0.62% over the preceding month.

Economy slumps in second quarter
Due to the slightly worse than expected June reading, second quarter GDP also fell a notch short of last month’s Consensus Forecast of 0.3% year-on-year growth. In fact, the 0.2% second quarter growth represented the slowest expansion in more than a year and highlights the current fragility of the Mexican recovery. In the first quarter, the GDP had expanded by an annual 2.3% pace. In part, however, the numbers were distorted by seasonal factors, as Easter was in the first quarter last year but in the second quarter this year, which subtracted four working days as a result. According to seasonally adjusted data, the economy actually expanded 1.2% over the preceding quarter, ending a string of two negative quarters.

Mexican economy suffers from weak U.S. demand and competition from China …
Supply and demand data have not yet been published but the evidence so far suggests that the Mexican economy is suffering mostly from a weak external sector, as demand from the United States continues to be subdued. In addition to weaker US demand, Mexico is also battling increased competition from China, as numerous multinational companies have relocated manufacturing facilities to the new WTO member.

… sending the manufacturing industry into a steep nosedive, which …
The fallout from the US economy and increased competition from China is reflected in the performance of the manufacturing sector, which constituted the weakest sector in the second quarter. The manufacturing industry lost a whopping 4.5% in the second quarter over the same quarter last year, following on 0.9% growth in the first quarter. The deterioration compared to the previous quarter amounted to 5.4 percentage points, which is the worst slide since the second quarter of 1995, when the economy adjusted to the peso crisis. Moreover, the weakness in the manufacturing industry also spilled over to other industrial sectors. Construction grew by only 1.3% in the second quarter after a 5.9% expansion in the first, amid lower industrial construction activity and the electricity, gas and water sector also experienced a slowdown from 3.0% growth in the first quarter to 0.8% in the second, as industrial energy consumption dropped. Therefore, the whole industrial sector contracted by 3.0% (Q1: +1.8% yoy), as a 3.7% pickup in mining activities (Q1: +1.3%) was insufficient to compensate the downside effects emanating from the manufacturing industry.

… is also spilling over to weaker services
Services, which depend more on domestic demand components, fared better although the 1.3% annual growth rate is less than half the 2.8% expansion recorded in the first quarter, as weaker industrial activity also left its mark in services. Growth in transport, storage and communications deteriorated from a 4.3% growth rate in the first quarter to 1.0% in the second, amid weaker transport activities and lower sales of industrial goods, which also sent the commerce, restaurants and hotels sector into the red (Q2: -0.3% yoy) after 1.6% growth in the first quarter. Financial services remained strong. The 3.9% expansion registered in the second quarter was only 0.2 percentage points weaker than in the first quarter. Finally, apart from mining, agriculture constituted the only sector that exhibited improvement over the previous quarter, as the sector rebounded from a 0.2% decline in the first quarter to 4.9% growth in the second.

Outlook cut yet again amid weaker than expected second quarter
The weak second quarter renders a more pronounced recovery in second half of the year more unlikely. Compared to last month’s expectation, Consensus Forecast panellists have cut yet another notch from the second half growth forecast to 2.2%. The forecast for the full year, however, was maintained at last month’s 1.7%, the first stabilisation following on twelve months of consecutive downward revisions. More importantly, emerging optimism about a global recovery in 2004, led by the United States, is also beginning to show in next year’s outlook. Consensus Forecast panellists have hiked their projection by 0.1 percentage points since last month to the current 3.6%.