Mexico - Economic Briefing June 2004

First Step in Recovery Taken

The latest developments have prompted a respite from worries that the Mexican economy had lost its link with the booming US economy, as they suggest that the US rebound is finally being transmitted.  Nevertheless, competition from China and other Asian manufacturing hubs will continue to erode market share in the United States.  On the other hand, higher oil prices are generating windfall profits and provide the public sector with additional spending power.

Economy blasts expectations in March
In March, economic activity increased 5.5% over the same month last year, according to the global indicator for economic activity (IGAE, Indicador Global de la Actividad Económica).  The actual reading blasted expectations, which had the economy growing at an annual rate of 3.1% and was well above the already strong 3.4% annual growth recorded in February.  In fact, the March growth rate represented the best reading since October 2000 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 figures, the economy expanded at a record 2.48% over the preceding month, more than compensating the 1.57% monthly contraction registered in February.  In fact, the March seasonally adjusted growth rate is the highest ever registered since the National Statistical Institute (INEGI) started elaborating this indicator in 1993. 

March boost lifts first quarter growth above estimates
Owing to the surprise boost to economic activity observed in March, first quarter gross domestic product (GDP) growth came in well ahead of market expectations of 2.9%.  In the first quarter, GDP expanded by 3.7% over the same period the year before, almost double the 2.0% annual growth rate observed in the final quarter 2003.  According to seasonally adjusted data, the economy expanded at an even more vigorous rate than suggested by the annual data, as INEGI reported strong 1.32% growth over the preceding quarter.  Following on 1.37% quarterly growth in the final quarter 2003, the six-month period constitutes the strongest bout since 2000, when the economy was in a full bloom.

Industrial sector continues recovery
Agriculture expanded by 4.6% over the first quarter 2003, almost unchanged compared to the 4.8% annual growth observed in the fourth quarter.  Industry, in contrast, experienced a sharp rebound from the anaemic 0.3% growth in the fourth quarter.  In the first quarter, the industrial sector expanded by a robust 3.2% and thus distanced the two consecutive contractions registered in the second and third quarter last year, which raises hopes that the positive momentum will lift the sector from past sluggishness.  All sub-sectors that constitute the industrial sector improved over the fourth quarter.  Within industry, mining led growth with an annual expansion of 6.4%, following on 5.3% growth recorded in the fourth quarter.  Construction also improved over the fourth quarter, as growth accelerated from a 3.5% pace to 4.9%.  Electricity, gas and water, exited the slight 0.1% contraction observed in the fourth quarter and grew by 1.4% in the first quarter. 

Manufacturing industry exits recession
Most notable, however, is the improvement of the manufacturing industry, a key sector, as the country tries to emerge from lacklustre growth.  The manufacturing industry left the 0.6% contraction of the fourth quarter behind and expanded a sound 2.8% in the first quarter of 2004.  In the past year, the lagging 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 United States to Asian competitors.  Within manufacturing, the so-called maquiladora industry (in-bond manufacturing), is particularly important since it directly serves the United States 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 first quarter, activity in the maquiladora industry grew 2.9%, following on flat growth in the final quarter 2003.  The first quarter reading represented the first positive growth in more than half a year.  Moreover, the growth trend continues to point upwards, providing a backdrop for more solid growth for the remainder of this year. 

Services grow at quicker pace than in the fourth quarter
Services expanded 4.1% in the first quarter over the same quarter last year, which also marked an improvement when compared to the 2.6% annual growth registered in the fourth quarter.  Transport, storage and communications sector exhibited the most positive development, as growth more than doubled from the already resilient 4.7% in the fourth quarter to buoyant 9.5% growth in the first quarter.  According to INEGI, the sector profited from strong growth of fixed line and cellular telephone services as well as satellite communications.  Growth in financial services and real estate, in contrast, slowed slightly from 4.7% in the fourth quarter to 4.3%.  Finally, commerce, restaurants and hotels added 3.8% over the first quarter 2003.