Mexico - Economic Briefing March 2004

Outlook Begins to Improve

The outlook for the Mexican economy is beginning to improve.  While economic growth will not reach past exuberance, when the country profited from relocations of U.S. manufacturing facilities, healthy U.S. growth is finally being transmitted to Mexico.  However, downside risks remain.  Rising inflationary expectations could prompt monetary authorities to tighten the reins further and on the external side, Mexico continues to face the threat of low-cost competition from China.

Economy surprises again positively in December
In December, economic activity increased 3.9% over the same month the year before, according to the global indicator for economic activity (IGAE, Indicador Global de la Actividad Económica).  The actual reading was well above expectations, which had the economy growing at an annual rate of 2.9% and almost doubled the already strong 2.0% annual growth recorded in November.  In fact, the December growth rate represented the best reading since April 2002 and raised hopes that the robust recovery in the United States is finally being transmitted to the Mexican economy.  A month-on-month comparison corroborates the annual data.  According to seasonally adjusted data, the economy expanded at a strong 0.54% over the preceding month, less than the 1.20% monthly growth registered in November but the fourth consecutive month of expansion.   

Year-end boost lifts fourth quarter growth above estimates
Owing to the surprising year-end boost, fourth quarter gross domestic product growth (GDP) came in a notch ahead of expectations of 1.9% and even slightly surpassed expectations for 1.2% full year growth seen by both the market and the Central Bank.  In the fourth quarter, GDP expanded by 2.0% over the same period the year before and full year growth came in at 1.3%.  According to seasonally adjusted data, the economy expanded at an even more vigorous rate than suggested by the annual data.  The National Statistical Institute (INEGI) reported strong 1.20% growth over the preceding quarter.  This is not only well above the 0.06% growth observed in the third quarter but represents the strongest reading in more than three years.   

Manufacturing industry remains in recession but improves markedly over third quarter
Agriculture constituted the fastest growing sector, expanding by 4.8% over the fourth quarter 2002, following on 3.4% annual growth in the third quarter.  Industry, in contrast, expanded a meagre 0.3%.  However, while barely positive, the reading puts an end to two quarters of contractions and raises hopes that the positive momentum will lift the sector from past sluggishness.  Within industry, mining led growth.  In the fourth quarter, the mining sector expanded an annual 5.3% pace, following on 3.6% growth recorded in the third quarter.  Construction also improved over the third quarter even though the 3.5% expansion was just a notch faster than the pace observed in the third quarter.  Electricity, gas and water, in contrast, deteriorated, as the paltry 0.3% growth registered in the third quarter turned into a tiny contraction of 0.1%.  Most notable, however, is the improvement of the manufacturing industry, a key sector for success, as the country battles its way back from subdued growth to recovery.  The manufacturing industry still contracted but the 0.6% decline represented a notable improvement when compared to the 3.4% contraction registered in the third quarter.  In the past year, the lagged recovery of the Mexican manufacturing industry in spite of record growth in the United States had raised concerns, as it suggested that the Mexican economy had lost a larger than expected market share in the U.S. to Asian competitors.  Within manufacturing, the so-called maquiladora industry, the in-bond manufacturing facilities, is particularly important since it directly serves the U.S. market and thus acts as a good indicator for measuring to what extent the rebound in the U.S. is finally transmitted to the Mexican economy.  In the fourth quarter, activity in the maquiladora industry grew 0.1%, which represented the first positive growth in more than half a year.  Moreover, growth in the maquiladora industry had picked up towards the end of the year and the emerging trend to higher growth is providing a backdrop for more solid growth in 2004.   

Services grow at quicker pace than in the third quarter
Services expanded 2.6% in the fourth quarter over the same quarter a year ago, which also marked an improvement when compared to the 1.7% annual growth in the third quarter.  Financial services and real estate added 4.7% over the fourth quarter 2002 and thus improved notably over the third quarter.  The same pace was registered in the transport, storage and communications sector.  According to the National Statistical Institute (INEGI), the sector profited from strong growth of fixed line telephone services, cellular phone services and satellite communications.  Finally, commerce, restaurants and hotels added 2.5% over the fourth quarter 2002.  In particular, higher commercial activity for the domestic market but also trade-related activities lifted the sector.