Mexico - Economic Briefing August 2004

Oil Prices and U.S. Growth Fuel Optimism Over Economy (continued)

Leading indicators and consumer confidence provide dark picture for immediate outlook
Additional indicators suggest that the economy is deteriorating.  The leading and coincident indicators for May, published on 5 August, contrast with the recent optimism.  The coincident indicator that tracks the current development of the economy was down 0.47% over the preceding month, precisely mirroring a 0.47% increase in April.  The leading indicator that tries to anticipate the development of the economy in the months ahead, declined 0.86% over the preceding month.  In addition, consumer confidence, which had already dropped a notch in June, plummeted 3.6 percentage points to 96.0% in July, as all five sub-categories of consumer confidence turned into the red.  In particular, the households’ willingness to purchase durable consumer goods plunged in July.

Outlook increasingly optimistic owing to favourable global backdrop
Despite the current ambiguous picture for the Mexican economy, Consensus Forecast panellists are increasingly optimistic about growth prospects for this year. In addition to the favourable global setting, the buoyant outlook for the U.S. economy should provide a solid backdrop for a recovery in Mexico.  Panellists believe the economy will grow by 4.3% in June, resulting in a second quarter expansion of 3.8%.  This growth figure is in line with the latest government assessment from 4 August, which has second quarter GDP growing at close to 4%.  According to the Consensus, the economy will maintain the current expansion pace, growing by 3.6% in the third quarter and 3.7% in the final quarter.  For the full year, Consensus Forecast panellists expect the economy to expand by 3.8%, which is up another notch from last month’s forecast, following on upward revisions in the previous three months.  On 28 July, the Central Bank raised its 2004 growth estimate to a range of 3.75% and 4.25%, above the previous forecast of 3.5% to 4.0%.  The prospects for further acceleration in economic growth, however, remain moderate, as suggested by the 3.4% growth rate anticipated for 2005.  The increased competition from China in Mexico’s prime export markets and the inability of the Fox administration to implement much-needed economic reforms are key obstacles to a more resilient economic growth trend. 

Public sector incurs surplus, as revenues jump amid higher oil prices
In the first half, Mexico’s non-financial public sector incurred a surplus of 56.8 billion pesos (US$ 5.1 billion).  The surplus was 13.5% below the surplus registered in the same period last year.  However, the decline was due to advance payments in the education sector in June, which last year occurred in July.  Without these payments, the first half surplus actually exceeded last year’s surplus by 23.6% in real terms.  Public sector revenues reached 879 billion pesos (US$ 78.6 billion), which was 4.5% above the first half 2003 revenues in real terms.  Actual revenues also exceeded estimated revenues by 53.7 billion pesos (US$ 4.8 billion), amid strong oil prices and a higher export platform.  As a result, oil-related income increased by 13.9% in real terms and thus accounted for 87.4% of the total excess revenue.  Public sector expenditures reached 817.8 billion pesos (US$ 73.1 billion), which was 5.4% in real terms above last year’s level (2.2% considering the above mentioned advance payments).  Even though the revenues significantly exceeded the government’s plan, the finance ministry claimed that the surplus was "in line with the annual goal."  In fact, Consensus Forecast panellists continue to expect the government to incur a deficit equivalent to 0.3% of GDP this year, which is in line with the government’s fiscal deficit target outlined in the original budget.  However, if oil prices remain at their current levels, the deficit could actually narrow.  In the first half, the price for the Mexican mix of crude oils was US$ 28.5 per barrel, well above the US$ 20.0 per barrel projected in the budget, and by the end of July the oil price rose US$ 33.0 per barrel.