Mexico - Economic Briefing October 2004

Central Bank Continues to Tighten Policy

The economy is gathering momentum.  While the soft patch observed in the U.S. economy in the second quarter has limited the potential for recovery in Mexico, higher U.S. growth in the second half of the year should provide a solid backdrop for a Mexican rebound.  In addition, higher oil prices are generating windfall profits and are providing the public sector with extra spending power to boost economic activity.  On the monetary front, the Central Bank continues to tighten the reins in order to stem rising inflationary expectations.

Economy gathers speed in second quarter
A more complete data set for national accounts confirmed the 3.9% annual second quarter growth reported last month.  The reading represents a slight improvement compared to the 3.7% growth registered in the first quarter and confirms that the economy bottomed out in the second quarter of 2003, when economic activity was virtually unchanged over the same period in the prior year.

Higher exports, investment and consumption spur growth in second quarter
Increased export growth and a pickup in domestic demand drove the improvement in the second quarter compared to the preceding quarter.  However, a reduction in inventories mitigated the positive developments in the domestic economy.  Total consumption growth added a full percentage point from 3.2% in the first quarter to 4.2% in the second.  The improvement was entirely due to a pickup in private consumption, which accelerated from 3.7% growth in the first quarter to 5.4% in the second.  Government consumption, in contrast, deteriorated further from a 0.3% contraction in the first quarter to a 5.0% decline in the second, despite increased government spending power in the wake of higher oil revenues.  Gross fixed investment grew at a resilient 5.8%, which was even above the robust 4.5% registered in the preceding quarter.  Thus, investment growth experienced the fastest expansion observed since 2000.  Quarter-on-quarter data corroborate the acceleration observed in the annual figures.  According to seasonally adjusted data, gross fixed investment added 1.85% over the preceding quarter, which is equivalent to an annual growth rate in the double-digit range.  The external sector also developed positive in the second quarter.  Exports of goods and services grew at the fastest pace in more than three years (Q2: +14.4% year-on-year; Q1: +10.4% yoy).  Import growth also picked up since the Mexican export industry depends largely on imported intermediate goods as inputs.

Economy disappoints in July but upward trend remains intact
In July, 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 3.9% pace and was also below the 5.2% annual growth rate recorded in June.  A month-on-month comparison, confirms the weaker reading.  According to seasonally adjusted data, the economy contracted 0.21% over the preceding month, following on a 0.48% monthly expansion in June.  However, the bout of weakness does not necessarily indicate that the recovery of the economy is over before it has begun.  In part, the weak July reading is due to a slump in agriculture, where activity dropped 6.4% over August last year, following on 7.6% annual growth in June.  The agricultural sector frequently exhibits erratic growth movements and could easily bounce back in the coming month and thus compensate for the bout of weakness observed in July.  Services and industry also slowed over June, albeit on a lesser scale.  Industrial output growth dropped from 5.2% in June to 3.8%, while services slowed from a 5.1% expansion in June to a 3.8% pace in July.  Nevertheless, the upward trend in the overall economy remains intact.  In July, the annual average growth rate inched upwards a notch from 2.7% in June to 2.8% - the ninth consecutive increase. 

Unemployment jumps to seven-year high, as economic recovery attracts new job seekers
While recent indicators paint an ambiguous picture of the economy, the overall balance is tipped on the positive side.  In August, unemployment rose to 4.4% from 3.8% in July.  The August figure was well above market expectations, which had anticipated unemployment to remain unchanged at 3.8%.  However, instead, unemployment surged to its highest rate observed since January 1997, when the economy was emerging from the after-effects of the Peso crisis.  The reason for the increase in the open unemployment rate was a sudden jump in the rate of participation, as improved economic developments observed in the past months prompted many inactive people to start looking for jobs.

Leading indicators and consumer confidence augur well for continued recovery
Consumer confidence and leading indicators, on the other hand, augur an improvement of the economy.  The leading and coincident indicators for July, published on 6 October, support recent optimism.  The coincident indicator that tracks the current developments in the economy was up 0.71% over the preceding month in seasonally adjusted terms, following on a 0.26% decline in June.  The leading indicator that tries to anticipate future developments in the economy, increased 0.79% over the preceding month.  In addition, consumer confidence, which had dropped for three consecutive months up to August, recovered by 1.3 percentage points in September to reach 96.8 points, as all but one of the five sub-categories that comprise the overall index of consumer confidence improved over the previous month.  Only the current economic state of the households was seen more negatively (-2.1 percentage points month-on-month) but households were optimistic about their future economic state (+3.6 percentage points over the preceding month).