Mexico - Economic Briefing November 2003

Recovery in Sight as U.S. Manufacturing is Rebounding But Shadows Remain (continued)

High unemployment erodes consumer confidence
Additional data suggest that Mexico remains dependent on a U.S. rebound to revive economic activity, as the domestic side of the economy is too weak to rekindle demand despite a favourable monetary environment. In September, unemployment reached 3.9%, down by a 0.1 percentage point over the previous month. However, the August rate had marked the highest rate since 1997, when the economy was overcoming the effects of the peso crisis. The high unemployment rate is also withering away consumer confidence. In October, the recently introduced consumer confidence index of the National Statistical Institute (INEGI) dropped for the third consecutive month from 97.2 index points in September to 96.7 in October, as Mexicans are increasingly sceptical about the economic future of their country. The sub-index measuring the economic prospects of the country over the next 12 months experienced the highest decline compared to September, dropping 2.3 percentage points.

Outlook continues to deteriorate but economy to recover in 2004
The dismal August reading in economic activity has prompted analysts to slice their estimates for annual GDP growth in the third quarter from 1.4% expected last month to the current 0.9%, following on 0.2% growth in the second quarter. The Consensus is thus slightly above the latest government estimate, which has third quarter GDP growth at 0.7%. In the fourth quarter, Consensus Forecast panellists expect the higher demand from the U.S. to lift growth in Mexico to 2.3%. However, the current Consensus is 0.3 percentage points below the September forecast. Consequently, the projection for the full year dropped yet another notch over last month to 1.5%. In late October, the Central Bank followed the more sombre assessment of the private sector and lowered its forecast for 2003 GDP growth from 2.0% to 1.5%, following on last month’s reduction in the Finance Ministry’s forecast. For 2004, monetary authorities expect growth to accelerate above 3.0%, whereas the government just lowered its projection from 3.5% to 3.1%. However, the government’s reduction may be motivated by attempts to improve the bargaining position in the 2004 budget discussions. Panellists are more upbeat and expect 3.5% growth in the coming year with a steady acceleration during 2004, starting with first quarter growth of 3.0% and ending with the fourth quarter with a 4.1% expansion.

Peso weakening accelerates bringing the peso to new historic lows
The peso ended the weakening string it initiated in May this year. 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 in early October, which had sent the peso to a historic low of 11.32 pesos to the US$ on 8 October. Since then the peso has recovered some of the lost ground, ending the month just above the 11 pesos to the US$ threshold. Consensus Forecast panellists believe that part of the weakening observed in the May to October period is exaggerated and anticipate the peso to gain strength by the end of the year, with the year-end exchange rate reaching 10.93 pesos to the US$.