Mexico - Economic Briefing September 2004

Economic Activity Gaining Speed Amid High Oil Prices and Strong Demand From the U.S.

Assisted by a recovery of the link to the booming U.S. market, the Mexican economy is growing at a faster pace than anticipated earlier.  In addition, higher oil prices are generating windfall profits and are providing the public sector with extra spending power to boost economic activity.  Nevertheless, a standstill on economic reforms and competition from China and other Asian manufacturing hubs will limit the growth potential for the years ahead.

Economy above expectations in June
In June, economic activity increased 5.1% 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 well above expectations, which had the economy growing at an annual 4.3% pace and was also above the 3.2% annual growth rate recorded in May.  A month-on-month comparison, confirms the strong reading.  According to seasonally adjusted data, the economy expanded a strong 0.50% over the preceding month, following on flat growth in May.  Moreover, the clear upward trend remains intact.  In June, the annual average growth rate inched up 0.3 percentage points from 2.4% in May to 2.7%, the eighth consecutive increase. 

June boost lifts second quarter growth above estimates
Owing to the better-than-expected June reading, second quarter gross domestic product (GDP) growth of 3.9% came in a notch ahead of market expectations of 3.8%.  The second quarter pace was almost unchanged from the 3.7% annual growth rate observed in the first quarter of the year.  According to seasonally adjusted data, the economy expanded at a more vigorous rate than suggested by the annual data, as the National Statistical Institute (INEGI) reported strong 1.19% growth over the preceding quarter, following on 1.35% quarterly growth in the first quarter, the third consecutive quarterly increase.

Industrial sector continues recovery
Following on the sharp rebound of 3.2% growth in the first quarter, the industrial sector expanded by a robust 3.8% in the second quarter and thus continued the upward trend observed since the second quarter last year, when the sector was mired in recession.  The fourth consecutive acceleration raises hopes that the positive momentum will persist and lift the sector from past sluggishness.  Not all sub-sectors that constitute the industrial sector improved over the first quarter.  In fact, mining, construction and electricity, gas and water actually decelerated compared to the first quarter.  Mining slowed from an annual expansion of 6.5% to 2.4%; construction growth dropped from 4.9% to 4.4% while electricity, gas and water added only 0.8% over the second quarter last year, following on 1.4% growth observed in the first quarter.

Manufacturing continues acceleration trend amid strong rebound of maquiladora industry
However, industrial manufacturing, which constitutes the key sector for the economy, as the country is emerging from lacklustre growth, continued to quicken its pace.  Since the second quarter last year, when the sector was deeply entrenched in recession, industrial manufacturing has quickly gained speed from a 4.6% contraction to 2.9% growth in the first quarter.  In the second quarter of this year, growth accelerated further to 4.0%, the fastest growth observed since the final quarter 2000.  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 U.S. market and thus acts as a good indicator for measuring to what extent the rebound in the United States is finally being transmitted to the Mexican economy.  In the second quarter, activity in the maquiladora industry grew 9.0%, following on 3.7% growth in the first quarter, also the highest reading since the last quarter of 2000. 

Services grow at quicker pace than in the fourth quarter
Services expanded 4.1% in the second quarter over the same quarter last year, unchanged from the first quarter.  Commerce, restaurants and hotels expanded 4.0%, which was a little above the 3.8% expansion observed in the first quarter.  The slight acceleration was mainly due to higher sales volumes related to the external sector.  Growth in the transport, storage and communications sector slowed from the exuberant 9.5% registered in the first quarter but remained robust with an 8.2% expansion.   According to INEGI, the sector profited from strong growth of fixed line and cellular telephone services.  Growth in financial services and real estate, in contrast, accelerated from 4.3% in the first quarter to 5.0%.