dissolving of the link between the Mexican and the U.S. economy remains a
dominant factor in economic developments. Since the inception of
NAFTA, Mexico had experienced strong growth, driven by demand for cheap
labour from the U.S.. However, the failure to create new investment
opportunities and increasing competition from abroad, particularly China,
has derailed this beneficial link. As a result, the Mexican economy
continues to ail along, despite record U.S. growth. The U.S.
manufacturing sector, which had lagged behind the overall economy, is
beginning to recover at a more pronounced pace, which could provide the
Mexican economy with the needed impetus to leave the slump behind.
continues slump in third quarter
demand data published for the third quarter shortly after last month’s
Consensus Forecast, confirmed the 0.4% annual gross domestic product (GDP)
expansion released earlier. The third quarter reading represents a
disappointing improvement over the 0.2% growth registered in the second
quarter. Moreover, seasonal factors inflated the annual data.
According to seasonally adjusted data, the economy actually contracted
0.36% over the preceding quarter, following on 1.19% growth in the second
keeps up economy but investment enters negative territory
improvement in the annual growth rate was broad-based and seized both the
domestic side of the economy and external sectors. On the domestic
side, the positive development in consumption stands out. Private
consumption added 3.8% over the third quarter 2002, following on a meagre
0.9% improvement in the second quarter. Public consumption growth
actually slowed. However, the relatively small slowdown (Q3: +2.5%
year-on-year; Q2: +2.8% yoy) was more than compensated for by private
consumption, which accounts for a much higher share of total consumption.
Accordingly, total consumption registered more than triple the 1.1% annual
growth rate observed in the second quarter (Q3: +3.7% yoy). Gross
fixed investment also improved, increasing 0.7% over the third quarter
2002, following on a 3.6% contraction in the second quarter.
Investment, however, suffered from a massive adjustment in inventories,
which sent total investment (i.e. incl. gross fixed investment) into a
double-digit contraction and thus constituted the key factor working
against a more positive development in the total economy. On a
positive note, however, the adjustment in inventories, also sows the seeds
for a more pronounced pickup in the near future, as businesses can hardly
sustain the pronounced drop in inventories for long, particularly given
the current rebound in private consumption.
sector improves over second quarter but remains weak spot in recovery as
demand from U.S. only slowly feeding through to maquiladora industry
sector improved over the second quarter but remained in negative territory,
as exports continued to suffer from a lack of demand in the U.S. economy.
As a result, exports declined 0.5% over the same period last year,
compared to a 3.5% contraction observed in the second quarter.
Imports, which serve principally as input for the assembling plants
generating most of the export revenues, also declined but improved from
the 5.2% contraction in the second quarter to a 1.4% drop in the third.
The current improvement in external accounts is rather disappointing given
that the U.S. manufacturing industry had finally shown signs of a rebound.
growth below expectations
economic developments observed in the third quarter are likely to have
carried over into the fourth quarter. In October, economic activity
expanded a meagre 0.5% 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 had the economy growing at an annual
rate of 1.3%. Moreover, the reading was not even half the 1.3%
expansion observed in September. However, according to seasonally
adjusted data, the economy expanded 0.25% over the preceding month
compared to a 0.13% expansion in September. Because of the
disappointing October reading, Consensus Forecast panellists have cut
their fourth quarter projection to 2.0% from 2.3% expected last month and
full year growth is seen at just 1.2%, down 0.2 percentage points.
Moreover, hopes for a solid recovery this year are also dimming. The
Consensus sliced 0.2 percentage points from last month’s 2004 GDP growth
forecast to 3.1%.
approves 2004 Budget in last minute after two months of bitter discussions
December, just a day before the constitutional deadline expired, the
Congress approved the 2004 budget. The approval followed a lengthy
period of negotiations about a tax reform package introduced by President
Fox, which sought to broaden the coverage of the value added tax (VAT) to
items such as food and medicine, which are currently exempt. The proposal
met strong opposition from the country’s left-siding politicians, which
lamented the social costs of the government’s initiative, despite
specific compensation proposed for lower income groups. While
finally voted down, the bill showed a clear rift emerging in the Mexican
society, with the left-wing represented by the Democratic Revolution Party
(PRD, Partido de la Revolución Democrática) and the right represented by
Fox’s conservative National Action Party (PAN, Partido Acción Nacional).
In fact, the rift also appears to go right through the country largest
party, the Party of Institutional Revolution (PRI, Partido Revolucionario
Institucional), which had governed Mexico for over 70 years until
President Fox assumed power in 1998. The party fired its
leader in Congress, Elba Esther Gordillo, after she had – prematurely
– pledged the support of her party for the tax bill.
opts for conservative budget
Owing to the
entrenched negotiations over the last two months of the year, the final
budget turned out more conservative than the original proposal. In
total, the Mexican government plans for revenues of 1,608 billion pesos
(US$ 140.1 billion) and to spending of 1,632 billion pesos (US$ 142.2
billion), approximately one percentage point of GDP less than in 2002.
The resulting fiscal deficit of 24 billion pesos (US$ 2.1 billion) is
equivalent to 0.3% of GDP. Moreover, the current budget is based on
rather conservative estimates as the comparison with the Consensus
Forecast shows (see table).