Mexico - Economic Briefing August 2004

Oil Prices and U.S. Growth Fuel Optimism Over Economy

The Mexican economy is likely to grow at a faster pace than anticipated earlier.  Recent developments suggest that the Mexican economy has not lost its link with the booming U.S. economy.  In addition, higher oil prices are generating windfall profits and are providing the public sector with extra spending power to boost economic activity.  Nevertheless, competition from China and other Asian manufacturing hubs will continue to threaten Mexico’s market share in the United States, limiting potential for expansion in the years ahead.

Economy disappoints in May but upward trend remains intact
In May, economic activity increased 3.0% over the same month last year, according to the global indicator for economic activity (IGAE, Indicador Global de la Actividad Económica).  The actual reading was below expectations, which had the economy growing at an annual 3.6% pace and was also below the 4.1% annual growth rate recorded in April.  A month-on-month comparison, confirms the weaker reading.  According to seasonally adjusted data, the economy contracted a strong 0.51% over the preceding month, following on a 0.68% monthly expansion in April.  Thus, the much hoped for recovery in the Mexican economy remains elusive.  That said, the upward trend remains intact.  In May, the annual average growth rate inched upwards 0.2 percentage points from 2.4% in April to 2.6%, the seventh consecutive increase. 

All sectors growing at slower pace
In May, all sectors experienced slowdowns compared to the preceding month.  Agriculture grew at an annual rate of 2.3% (April: +6.6% year-on-year) and services added 3.6% over the same month last year (April: +4.3% yoy).  The industrial sector increased 2.1%, barely more than half the 3.9% expansion observed in April.  The slowdown in the industrial sector was broad-based and actually seized all four sub-sectors surveyed by the National Statistical Institute (INEGI), namely mining, industrial manufacturing, construction and electricity, gas and water.  Mining expanded a paltry 1.3% over May 2003, following on 3.2% annual growth in April.  The slowdown was due to slower growth in oil and gas output as well as a deterioration in non-oil mining production, which actually slipped into negative territory following moderate but positive growth in April.

Manufacturing industry benefits from robust U.S. but recovery will remain moderate
Growth in construction halved from a strong 6.3% observed in April to 3.2% and the electricity, gas and water sector slipped slightly into the red (-0.1% year-on-year) following 1.5% growth in April.   The all-important industrial manufacturing decelerated at a lesser pace, as the sector still added 2.2% after 3.6% growth in April.  Nevertheless, the actual development contrasted with expectations.  The Consensus Forecast had expected an acceleration to 3.9% growth, amid promising signs emanating from rising external demand.  In the past three years, deep recession has overshadowed the industrial sector, which has dragged down the overall economy.   Moreover, during the past business cycle, the sector seemed to have decoupled from the U.S. manufacturing industry, which itself had lagged behind the general economic recovery.  However, recent data suggest that Mexico is following the increasingly promising developments in the U.S. manufacturing industry.  In July, the Institute for Supply Management (ISM) Purchasing Managers' Index (PMI) indicated that economic activity in the U.S. manufacturing sector grew for the 14th consecutive month.  The PMI for July registered an increase of 0.9 percentage points compared to the June reading of 61.1 points.  With 62.0 points in July, the PMI has now been above 60% for nine consecutive months, well above the 50-point threshold that separates an expansion from a contraction.  This is the longest period of growth above 60% since the early seventies and if the recovery in U.S. manufacturing persists through the second half of the year, the tentative recovery of the Mexican manufacturing industry will take a firmer hold.  In fact, Consensus Forecast panellists expect the entire industry to grow by 4.4% in the second half, up a full percentage point from the growth level observed in the first half of this year.  However, the expansion is likely to remain at that level.  The glorious past, in the wake of the recovery from the peso crisis in 1995, when the industrial sector had expanded above 7% per year before entering in crisis 2001, is unlikely to return, as Mexico continues to lose market share in the U.S. economy to competitors in China and Southern Asia.