Mexico - Economic Briefing May 2004

Uphill Battle on the Way to Recovery

Mexico continues to face an uphill battle on its way to economic recovery.  Increased competition from China and other Asian manufacturing hubs threatens to erode market share in the United States.  As a result, the manufacturing industry that is precariously dependent on U.S. demand is not rebounding as expected.  However, the extraordinary strength of the global rebound and the strong oil price will lift economic growth to at least a moderate recovery this year.

Economy surprises positively in February
In February, economic activity increased 3.3% 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 2.7% pace and also exceeded the 2.1% annual growth rate recorded in January.  In fact, with the exception of December, the growth rate represented the best reading since March 2003.  A month-on-month comparison, however, paints a different picture.  According to seasonally adjusted data, the economy contracted a strong 0.94% over the preceding month, following on a 0.88% decline in January.  The two successive months of contractions follow on four consecutive months of expansion, which had raised hopes that the robust recovery in the United States had finally begun spilling over to the Mexican economy. 

Economic pick-up seizing all sectors but recovery of manufacturing industry remains moderate In February, all sectors improved over the preceding month.  Agriculture grew at an annual rate of 5.5% (January: +4.2% yoy) and services added 3.8% over the same month last year (January: +2.6% yoy).  The industrial sector increased 2.2%, more than triple the 0.6% expansion observed in January.  In particular, the development in the manufacturing industry is promising.  In the past three years, deep recession has overshadowed the industrial sector, which has dragged down the overall economy.   Moreover, the sector was not benefiting 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 closely to the U.S. manufacturing activity, which itself had lagged behind the general economic recovery.  However, the U.S. manufacturing industry is now firmly on an upward trend.  In April, the Institute for Supply Management (ISM) Purchasing Managers' Index (PMI) indicated that activity in the manufacturing sector continued to rise.  While new orders contracted slightly compared to last month, production moved upward and employment grew at a faster rate. The PMI has now been above 60% for six consecutive months, well above the 50-point threshold that separates an expansion from a contraction.  Moreover, according to the ISM study, order backlogs are growing for the first time in several years, indicating a very strong start in the second quarter.  However, the improved conditions of the U.S. manufacturing industry are only slowly and erratically transmitting to Mexico.  In February, manufacturing activity added only 1.2% over the same month last year and according to seasonally adjusted data, the manufacturing industry contracted by 0.66% over the preceding month.  If the recovery in U.S. manufacturing does accelerate further in the first half of the year, as the ISM survey suggests, the ailing Mexican manufacturing industry could finally rebound.  Even so, the recovery will remain moderate.  Consensus Forecast panellists expect the entire industry to grow by 4.1% this year, as Mexico continues to lose market share in the U.S. economy to competitors in China and Southern Asia at a worrying rate.

Leading indicators and consumer confidence provide little hope for rebound
Additional indicators suggest that the economy faces an uphill battle on its way to recovery.  The leading and coincident indicators for February, published on 4 May, were both in negative territory.  The coincident indicator that tracks the current development of the economy was down 1.51% over the preceding month, the strongest drop since July 1995.  According to the National Statistical Institute (INEGI) the slide seized virtually all components of the index.  Furthermore, the leading indicator, which tries to anticipate the trajectory of the Mexican economy, dropped 0.29% over the preceding month.  The negative development in the manufacturing industry was the main reason for the weak showing of the leading indicator.  On a moderately positive note, consumer confidence inched up in April, as households assess the current state of the economy more positively than last year.  However, households are more pessimistic about their own future economic state than last month and are consequently more cautious about the purchase of durable consumer goods. 

Outlook remains cautiously optimistic owing to favourable global backdrop
Despite the current sombre picture of the Mexican economy, Consensus Forecast panellists are cautiously optimistic about growth prospects for this year. In addition to the favourable global setting, the buoyant outlook for the U.S. economy will provide an impetus for growth acceleration this year.  Panellists believe the economy will grow by 3.1% in March, resulting in a first quarter expansion of 2.9%.  Subsequently, the economy should gather steam, expanding by 3.1% in the second quarter, 3.4% in the third quarter and 3.7% in the final quarter.  For the full year, Consensus Forecast panellists expect the economy to expand by 3.2%, unchanged from last month’s forecast.  The increased competition from China in Mexico’s prime export markets and the inability of the Fox administration to implement long-awaited economic reforms seem to be the key obstacles to a more pronounced rebound in economic growth.  As a result, the prospects for further acceleration in economic growth remain moderate, as suggested by the 3.4% growth rate anticipated for 2005.