Mexico - Economic Briefing February 2004

Solid Recovery but US Export Bonanza Remains a Thing of the Past

The Mexican economy is poised for recovery this year.  However, economic growth will remain a far cry from past exuberance, when the country profited from relocations of U.S. manufacturing facilities.  Moreover, even though the current economic growth rebound appears solid, the expansion is disappointing, particularly those observers that had hoped for a cyclical rebound in the wake of three years of anaemic growth.

Economy surprises positively in November
In November, economic activity increased 2.1% 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 slightly above expectations, which had the economy growing at an annual rate of 1.9% and by far exceeded the 0.6% annual growth recorded in October.  In fact, the November growth rate represented the best reading since March 2003 and raised hopes that the robust recovery in the United States will take hold of the Mexican economy.  A month-on-month comparison corroborates the annual data.  According to seasonally adjusted data, the economy expanded at a very strong 1.29% over the preceding month, which was more than triple the 0.41% monthly growth pace observed in October and the strongest reading for any month in 2003. 

Promising signs in manufacturing industry
All sectors improved over the preceding month.  Agriculture increased at an annual rate of 10.6% (October: -6.9% yoy) and services added 2.6% over the same month last year (October: +1.9% yoy).  The industrial sector dropped 0.3%, which marked an improvement compared to the 0.8% contraction observed in October.  Moreover, the November reading represented the third consecutive month with a below 1%-contraction and according to seasonally adjusted data, industry actually expanded 0.77% over the preceding month.  In particular, the development in the manufacturing industry is promising.  In the past three years, the industrial sector has been mired in a deep recession, which has dragged down the entire economy.   Moreover, the sector could not benefit from the rebound of economic activity in the United States since, rather than depending on the entire economy, the development of the Mexican manufacturing industry is tied to the U.S. manufacturing activity, which itself has been lagging behind the general economic recovery.  This story is changing now.  In the United States, industrial and manufacturing activity is gaining speed.  In December, the Institute for Supply Management (ISM) index increased to 63.6 points well above the 50-point threshold that separates an expansion from a contraction.  Moreover, the rebound is finally being transmitted to Mexico.  In November, manufacturing activity added 0.89% over the preceding month, outperforming all other components of industry, including mining, construction and electricity, gas and water.  If the recovery of U.S. manufacturing does indeed accelerate further in the first half of the year, as the ISM survey suggests, the ailing Mexican manufacturing industry could finally rebound.  That said, the recovery will remain moderate – Consensus Forecast panellists expect the entire industry to grow by 3.7% this year – as Mexico continues to lose market share in the U.S. market to competitors in China and Southern Asia. 

Outlook beginning to stabilize
Consensus Forecast panellists believe that the moderate uptick in economic growth continued to accelerate through the end of the year.  In the final month of 2003, panellists believe that the economy expanded by 2.9%, resulting in 1.9% growth in the final quarter and 1.2% growth for the full year.  This is in line with the Central Bank, which lowered its latest 1.5% annual growth estimate to 1.2% at the end of January.  For 2004, the Central Bank expects growth to range between 3.0% and 3.5%, which is just in line with the current Consensus Forecast projection, which remained at the 3.1% expected last month.  The Consensus expects economic growth to accelerate continuously from 2.8% in the first quarter to 3.4% in the middle of the year and 3.6% in the final quarter.   However, growth is not likely to return to past exuberance next year.  The Consensus estimates that the Mexican economy will expand by 3.4% in 2005, down a notch from last months forecast.