Mexico - Economic Briefing April 2004

External Sector Showing Signs of Recovery

With domestic drivers such as progress on economic reforms missing, the country remains precariously dependent on its external sector to revive sluggish growth.  This means Mexico is facing an uphill battle amid increasing competition in the United States from China and other Asian manufacturing hubs and an exchange rate that many consider as being not sufficiently competitive to stave off the new competition.  However, recent evidence suggests that the external sector is indeed reviving, as healthy U.S. growth is finally being transmitted to Mexico.

Economy picks up speed in fourth quarter
A more complete data set for national accounts data confirmed the 2.0% annual fourth quarter growth reported last month.  The reading represents an improvement compared to the 0.6% growth registered in the third quarter and confirms that the Mexican economy bottomed out in the second quarter 2003 when economic activity was virtually unchanged over the same period in the prior year.

Higher exports compensate for weaker consumption
The improvement in fourth quarter growth compared to the preceding quarter was mainly driven by exports and a lower reduction in inventories.  The domestic side of the economy actually deteriorated.  Growth of total consumption dropped from 4.1% in the third quarter to 3.1% in the fourth.  The deterioration was entirely due to private consumption.  Growth in government consumption, on the other hand, accelerated slightly, as the government had more spending power in the wake of increased revenues from the higher oil price.  Gross fixed investment grew at a lacklustre 0.8%.  Investment in domestic machinery and equipment as well as in construction improved over the third quarter but the positive impact was contrasted by imported machinery and equipment, which reverted from a 1.9% expansion in the third quarter to a 0.5% contraction in the fourth quarter.  The external sector exhibited very positive developments, as demand for Mexican exports began to grow again following on two consecutive quarters with declines.  The growth rate of exports is still a far cry from past double-digit rates that characterised the external sector in the six years following the inception of the North American Free Trade Agreement (NAFTA) in 1994.  Nevertheless, the up tick observed in the fourth quarter comes at a moment of increased concern over whether the Mexican exports can withstand increased competitive pressures from China and other Asian economies.   

Year-end economic boost wanes in January
The positive development in the fourth quarter that profited from a year-end boost did not carry over into this year.  In January, economic activity increased 2.1% 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 in line with expectations but remained shy of the buoyant 3.9% growth observed in December.  In fact, according to seasonally adjusted data, the economy contracted 0.63% over the preceding month, following on 0.80% monthly growth registered in December and ending a string of four consecutive monthly expansions.  Agriculture expanded 4.2% and services added 2.6% over the same month last year.  Services profited from stronger activity in communications, real estate, financial services, commercial activities and educational services.  The industrial sector expanded 0.8% over January 2003, just a third of the 2.4% registered in December, which had raised hopes that the robust recovery in the United States was finally being transmitted to the Mexican economy.  In particular, the manufacturing industry, which accounts for the bulk of industrial activity and which holds the key to growth of the entire Mexican economy, reverted from the first expansion in eight months in December back to negative numbers in January.  Within industry, only mining and electricity, gas and water improved over December.  Construction and the maquiladora industry (in-bond manufacturing) deteriorated compared to December.  Finally, the growth rate in investment activity dropped to almost half the December pace in January (+1.7% year-on-year) as the expansion of investment in machinery and equipment decelerated to just 0.5%.