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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.
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