Mexico - Economic Briefing December 2004

Slowdown Ahead Amid Tighter Monetary Policy

The economy is poised for solid growth this year, as good economic prospects in the United States and resurfacing domestic demand should continue to fuel the growth engine in the final quarter of the year.  Next year, growth is likely to recede to a more moderate level, as the lack of economic reforms and tighter monetary policy will keep a lid on a more pronounced expansion.

Economy in line with expectations in September
In September, economic activity increased 4.4% 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 bang in line with expectations, and was one percentage point below the August reading, which was revised slightly upwards.  A month-on-month comparison, however, does not confirm the strong reading.  According to seasonally adjusted data, the economy actually contracted by 0.11% over the preceding month, following on 0.59% growth in August.  Despite the soft spot in September, the upward trend remains intact.  In September, the annual average growth rate inched up 0.2 percentage points from 3.4% in August to 3.6%, the eleventh consecutive monthly increase. 

Upward revisions to July and August data lift third quarter growth above estimates
Third quarter gross domestic product (GDP) growth of 4.4% came in a notch ahead of market expectations since the final numbers also brought a 0.2 percentage point upward revision to the July and August reading respectively.  The third quarter pace was half a percentage point faster than the 3.9% annual growth rate observed in the second quarter of the year.  However, according to seasonally adjusted data, the economy expanded at a less vigorous rate than suggested by the annual data, as the National Statistical Institute (INEGI) reported only 0.64% growth over the preceding quarter, following on 1.12% quarterly growth in the second quarter.

Industry continues recovery
The industrial sector expanded a robust 4.8% in the third quarter over the same quarter last year.  The reading was a full percentage point above second quarter growth and thus continued the upward trend observed since the second quarter last year, when the sector was mired in recession.  However, not all sub-sectors that constitute the industrial sector improved over the second quarter.  Mining slowed from an already sluggish 2.4% pace in the second to a paltry 1.6% expansion in the third quarter.  Construction and the electricity, gas and water sector, on the other hand, experienced an acceleration in activity.  Construction added 5.9%, following on 4.4% growth observed in the second quarter and electricity, gas and water accelerated from 0.8% growth to 2.8%. 

Manufacturing continues acceleration trend amid strong rebound of maquiladora industry
The pace in industrial manufacturing continued to quicken.  Since the second quarter 2003, when the sector was deeply entrenched in recession, industrial manufacturing has quickly gained speed to reach 4.0% growth in the second quarter.  In the third quarter of this year, growth accelerated further to 5.0%, the fastest expansion observed since the third quarter of 2000.  Moreover, the so-called maquiladora industry (in-bond manufacturing) is recovering at twice the pace observed in manufacturing as a whole.  The maquiladora industry 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 third quarter, activity in the maquiladora industry grew 10.2%, following on 9.3% growth in the second quarter.  The figure was also the highest reading since the end of 2000. 

Services grow at quicker pace than in the second quarter
Services expanded 4.8% in the third quarter over the same quarter last year, following on 4.1% in the second.  Growth in the transport, storage and communications sector accelerated from the already robust 8.2% registered in the second quarter to a very strong 9.3% in the third.   According to INEGI, the sector profited from strong growth of fixed line and cellular telephone services.  Commerce, restaurants and hotels expanded 4.9%, which was a well above the 4.0% expansion observed in the second quarter.  The slight acceleration was mainly due to higher sales volumes related to the external sector and higher hotel occupancy levels.  Growth in financial services and real estate, in contrast, decelerated from 5.0% in the second quarter to 4.4%. 

Leading indicators point upward but consumer confidence continues to decline
Consumer confidence and leading indicators provide a mixed picture of the immediate outlook for the economy.  The leading and coincident indicators for September, published on 3 December augur well for a further acceleration in economic activity.  The coincident indicator that tracks the current developments in the economy was up 0.35% over the preceding month in seasonally adjusted terms.  The rise was due to favourable developments in all categories that comprise the index with the exception of the economic activity index.  The leading indicator that tries to anticipate future developments in the economy increased 0.95% over the preceding month, as five of the six components developed favourably.  Consumer confidence, in contrast, declined yet again.  In November, the overall index of consumer confidence reached 95.3 points, down from 95.4 points in October.  While only a small decline, the November reading continues a series of lower consumer confidence that was only briefly interrupted in September.

Consensus more optimistic about economic prospects
The better-than-expected third quarter reading and the continued strong international setting have prompted Consensus Forecast panellists to raise their forecasts for economic growth this year another notch over last month to 4.1%, which is in line with the latest government assessment saying that the economy will grow more than 4% this year.  The panel maintained growth prospects for next year unchanged at 3.6%, which remains below the 3.8% government forecast underlying the budget proposal.