|
Outlook lowered yet again despite some signs of hope
Additional data do not provide much hope that the economy will recover
soon from its current slump. While leading and coincident indicators
published on 3 October present a mixed bag (coincident shows a decline,
leading an increase), the recently introduced consumer confidence index
declined over August - the second consecutive monthly drop. As a result,
consumer confidence is now at the lowest level observed since April this
year, when the uncertainties related to the war against Iraq subdued
consumer confidence.
Given the current dynamics of the domestic economy, a rebound to full
potential growth depends mostly on a recovery in the United States. The
outlook for the U.S. economy in general is improving (details see Latin
American overview at the beginning of the publication). However, more than
anything, Mexico depends on the development of the U.S. manufacturing
industry, which is lagging behind the rest of the U.S. economy in terms of
growth. In early October, the Institute for Supply Management (ISM)
reported that its national manufacturing barometer slipped to 53.7 in
September from 54.7 in August, which was below market expectations of
55.0. While still above the critical 50 point threshold, the outlook for
the U.S. manufacturing sector remains uncertain. Moreover, the employment
category of the report dipped further, to 45.7 in September from an
already low 45.9 in August.
Because of the dismal development in the domestic economy and uncertainty
about the U.S. manufacturing industry, Consensus Forecast panellists have
further reduced their growth outlook for this year. For the third quarter,
panellists lowered the forecast 0.2 percentage points to 1.4% and the
fourth quarter forecast was cut from 2.8% expected last month to the
current 2.6%. The forecast for the full year dropped to 1.6%, continuing
the series of downward revisions registered since August last year.
Moreover, the Consensus is sceptical that the anticipated rebound of the
U.S. economy next year will translate into a recovery to full potential
for the Mexican economy. With China’s competitive edge over Mexican labour
costs, many multinational companies are relocating production facilities
to the new WTO member and new investment projects in Mexico are becoming
increasingly scarce. Thus, even with U.S economic growth accelerating from
2.5% this year to 3.6% in 2004, Consensus Forecast panellists have reduced
their forecast for Mexican growth next year by a 0.1 percentage point to
the current 3.5%, which is in line with the new government forecasts. On 1
October, the government had halved its previous 3.0% growth estimate for
2003 and now expects the economy to expand only 1.5% this year. The
current government estimate for economic growth in 2004 is 3.5%.
Peso weakening accelerates bringing the peso to new historic lows
The peso continued the weakening string it initiated in May this year,
with a marked depreciation in early October, reaching its weakest level
ever to the US$. A number of factors have led to erratic shifts in the
currency this year, including the weakening of the US$ to the Euro and
changing sentiment about the prospects of a US-led recovery. However, more
recently, hopes for a rebound have waned and so has the value of the peso.
Concerns about a protracted recovery of the U.S. manufacturing industry
and increasing competition from Chinese manufacturing facilities had sent
the currency on pronounced weakening string, which has not yet abated.
These factors, which had dominated the development in the foreign exchange
markets since mid-year were exacerbated by the decision of international
rating agency Moody's to put the bonds of the state-owned oil firm,
Petroleos de México (Pemex), under review for a possible downgrade.
Finally, comments from the Central Bank President Guillermo Ortiz that he
was not concerned about the recent weakening sent the peso into a
tailspin. As a result, on 8 October, the currency reached its weakest
level ever: 11.32 pesos to the US$. Consensus Forecast panellists believe
that part of the recent weakening is exaggerated and anticipate the peso
to gain strength by the end of the year, with the year-end exchange rate
at 11.87 pesos to the US$.
|
