Mexico - Economic Briefing January 2004

Link to U.S. Economy Seems Lost (continued)

Central Bank overshoots inflation target significantly
In December, consumer prices increased 0.43%.  The actual rate was in line with last month’s Consensus Forecast of 0.42%.  The December reading represents the fourth consecutive month of above-average price developments, following on more moderate price movements up to September.  Annual headline inflation remained unchanged from November at 4.0%.  With this year-end rate, the Central Bank missed its 3.0% inflation target set years ago by a full percentage point.  In the second half of the year, the bank had to battle the adverse consequences resulting from the depreciating peso.  However, on the other hand, monetary authorities had a relatively easy task given the scenario of moderate to subdued domestic demand prevailing in 2003.  Moreover, short-term effects only played a minor role, as the 3.7% year-end core inflation rate, which excludes the volatile price categories that distort the monthly readings, suggests. 

Peso weakening continued until end of year
The peso continued the weakening trend observed in the past months with some minor ups and downs through the end of last year.  With a year-end exchange rate of 11.23 pesos per US$, the currency  experienced a nominal depreciation versus the U.S. of 7.5% compared to the closing rate at the end of 2002.  Throughout 2002, the peso experienced heightened volatility, beginning with a marked weakening in the first two months of last year, followed by a period of strengthening between March and May and ending in a period of sustained weakness thereafter, which lasted until the end of the year.  The ups and downs mostly reflected concerns about the country’s ability to benefit from the pickup in the U.S. economy as pessimism about increased competition from Chinese manufacturing facilities mounted.  In addition, the doubtful fate of the economic reforms, which the Fox administration hoped to implement, also exerted pressure on the currency.  This year, Consensus Forecast panellists expect a more stable exchange rate, with the currency weakening to 11.55 pesos per US$ by the end of the year

Outlook continues to deteriorate
With activity in the manufacturing industry subdued, the outlook for the Mexican economy remains clouded. Consensus Forecast panellists sliced another 0.3 percentage points from the fourth quarter growth forecast to the current 2.0% growth. As a result, the full year projection also dropped a notch compared to last month’s projection to 1.4%, continuing the trend of deteriorating prospects that has characterised the whole year. Moreover, the de-linking of the Mexican and U.S. economy is overshadowing the outlook for 2004. Despite improving growth prospects for the United States, the outlook for Mexican GDP growth dropped 0.2 percentage points compared to last month’s projection to 3.3%.