Mexico - Economic Briefing November 2004

Rising Inflation Triggers Additional Monetary Tightening

Economic growth is stabilising at a robust level.  With the soft patch observed in the U.S. economy in the third quarter over and good prospects for higher U.S. growth in the final quarter of the year, the Mexican economy should continue its recovery.  On the monetary front, the Central Bank continues to tighten the reins in order to stem rising inflationary expectations.

Economy surprises positively in August, confirming upward trend
In August, economic activity increased 5.2% 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 above expectations, which had the economy growing at an annual 4.5% pace and was also well above the 3.2% annual growth rate recorded in July.  A month-on-month comparison, confirms the stronger August reading.  According to seasonally adjusted data, the economy expanded 0.61% over the preceding month, following on flat growth in July.  Moreover, the upward trend in the economy remains intact.  In August, the annual average growth rate jumped upwards from 2.8% in July to 3.3% - the tenth consecutive increase.  All sectors improved over July.  Agriculture, which had experienced a bout of weakness in July with a 6.4% contraction, bounced back in August with a 6.9% expansion over the same month last year.  Services added 5.1% over August last year, following on 3.8% growth in July. 

Industrial sector experiences broad-based acceleration
The industrial sector increased 5.2% in August, well above the 3.8% expansion observed in July.  The acceleration 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 returned to positive territory, expanding 0.6% after having slipped into a 0.5% contraction in July.  The increase was due to faster growth in non-oil mining, amid strong output of gold, silver, iron, silicon and copper.  Oil and gas production, in contrast, sputtered and actually slipped into negative territory with a 1.7% contraction over August 2003. 

Manufacturing industry continues accelerating trend
Growth in construction jumped from 3.8% observed in July to 5.5% and growth in the electricity, gas and water sector rose from 2.2% in July to 2.8%.  The manufacturing industry expanded 5.7% in August, following on 4.4% growth in July.  Moreover, the all-important industrial manufacturing continued the acceleration trend observed since November last year.  In August, the annual average growth rate jumped almost a full percentage point from 1.4% in July to 2.3%.  Despite the improvement in economic fundamentals, Consensus Forecast panellists have lowered their forecast for full year growth by 0.3 percentage points over last month to the current 4.3%.  However, the expansion is likely to recede to 4.2% in 2005.  The exuberant 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 appears to be gradually losing attractiveness as a manufacturing hub when compared to competitors in China and Southern Asia.

Leading indicators and consumer confidence provide mixed bag
Consumer confidence and leading indicators provide a mixed picture of the immediate outlook for the economy.  The leading and coincident indicators for August, published on 5 November, were at odds with each other.  The coincident indicator that tracks the current developments in the economy was down 0.61% over the preceding month in seasonally adjusted terms, following on a 0.71% rise in July.  The decline was due to unfavourable employment data and lower real wages paid in the maquiladora industry (in-bond manufacturing).  In contrast, the leading indicator that tries to anticipate future developments in the economy, increased 0.35% over the preceding month.  Consumer confidence, which rose for the first time in September following on three consecutive declines, dropped again in October.  In October, the overall index of consumer confidence reached 95.4 points, down from 96.8 points in September.  In particular, the current economic state of the households was seen more negatively (-4.4 percentage points month-on-month).