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Economy short of expectations in March
In March,
economic activity increased 0.3% over the same month last year, according
to the global indicator for economic activity (IGAE, Indicador Global
de la Actividad Económica). The actual reading fell short of
expectations, which had the economy growing at an annual 3.6% rate and was
only a fraction of the 3.1% annual growth recorded in February. In part,
the March reading was distorted by the effect of Easter holidays, which
were in March this year but in April last year. As a result, March 2005
had less working days than March 2004. Taking this effect into account,
the economy would have expanded by 2.9% over March 2004. Nevertheless, a
month-on-month comparison corroborates the weak March annual data.
According to seasonally adjusted figures, the economy contracted 0.42%
over the preceding month, the weakest reading in more than a year.
March slump pushes first quarter growth
below estimates
Owing to the
surprise slump in March economic activity, first quarter gross domestic
product (GDP) growth came in well short of market expectations of 3.6%.
In the first quarter, GDP expanded by 2.4% over the same period the year
before, half the 4.9% annual growth rate observed in the final quarter
2004. According to seasonally adjusted data, the economy expanded at an
equally sluggish pace than suggested by the annual data, as the National
Statistical Institute (INEGI) reported a paltry 0.43% growth pace over the
preceding quarter. The first quarter growth figure was the slowest
expansion since the third quarter 2003. Nevertheless, it represented the
eighth consecutive quarter of positive quarter-on-quarter growth, further
supporting the ongoing recovery in the economy.
Industrial sector slumps
Agricultural
output declined by 1.5% over the first quarter 2004, contrasting the 2.9%
expansion observed in the fourth quarter 2004. Industry also experienced
a sharp deterioration with output declining 0.2% over the same quarter
last year, compared to the healthy 3.6% growth in the fourth quarter. The
first quarter reading for industry was the worst showing since the third
quarter 2003 and dashed hopes that the sector had finally surpassed the
sluggishness that lasted well into 2003. All sub-sectors that constitute
the industrial sector deteriorated over the fourth quarter. Electricity,
gas and water was the weakest sector with activity dropping 1.2% over the
same period last year, contrasting with a paltry but positive 0.8%
expansion in the fourth quarter. Mining followed suit with a 1.1%
contraction, following on zero growth in the fourth quarter. The
construction sector also lost some steam compared to the fourth quarter,
as growth decelerated from a 6.0% pace to just 1.0% growth.
Manufacturing industry enters recession but
maquiladora industry remains promising
The most
important first quarter development, however, was the deterioration of the
manufacturing industry, the key sector of the economy. Activity in the
manufacturing industry plummeted from a 3.6% expansion in the fourth
quarter to a 0.2% contraction in the first quarter of 2005. In the past
year, the recovery of the manufacturing industry had raised hopes that the
economy had re-linked to strong growth in the United States. Thus, the
first quarter slump once again raises concerns that the Mexican economy is
continuing to lose market share in the United States to Asian
competitors. However, developments in the so-called maquiladora
industry (in-bond manufacturing) suggest that things are not as bad as
suggested by the data for the entire industry. The maquiladora
industry directly serves the United States market and thus acts as a good
indicator for measuring to what extent the Mexican economy remains linked
to U.S. demand. In the first quarter, activity in the maquiladora
industry grew 6.4%, following on 7.3% growth in the final quarter 2004.
Moreover, the growth trend continues to point upwards, providing a
backdrop for more solid growth for the remainder of this year.
Services grow at a quicker pace than in the
fourth quarter
Services
expanded 4.1% in the first quarter over the same quarter last year, which
also marked a deterioration when compared to the 5.6% annual growth
registered in the fourth quarter. The transport, storage and
communications sector exhibited the most positive development, with the
sector expanding 7.8% over the same period last year, following on 9.9%
growth in the fourth quarter. According to INEGI, the sector profited
from strong growth in fixed line and cellular telephone services. Growth
in the commerce, restaurants and hotels sector dropped to less than half
the 7.0% pace observed in the final quarter last year with growth
decelerating to 3.3%. Finally, financial services and real estate, in
contrast, was the only sector that accelerated compared to the fourth
quarter, as growth inched upwards from 4.7% to 5.1% in the first quarter.
Consensus more pessimistic about economic
prospects
The worse
international setting and the recent sluggishness in economic activity
could translate into a slump in the domestic economy for the remainder of
the year. The leading and coincident indicators for March, published on 3
June, declined in unison for the second consecutive month. The coincident
indicator that tracks the current developments in the economy was down
0.17% over the preceding month in seasonally adjusted terms while the
leading indicator that tries to anticipate future developments in the
economy decreased 0.08% over the preceding month. In addition, consumer
confidence also dropped. In May, the overall index of consumer confidence
reached 99.7 points, down from 100.3 points in April. Consumers’
perceptions over the current and future state of the Mexican economy
improved. However, the May reading represents the third consecutive month
of declining consumer confidence. Therefore, the domestic economy is
unlikely to pick up the slack from the more sluggish external sector.
Consensus Forecast panellists have reflected the recent negative
developments by cutting their forecasts for economic growth this year by
0.1 percentage points over last month to 3.7%. Growth prospects for next
year remained unchanged at 3.7%.
Current account deficit increases in first
quarter amid slower exports growth
In the first
quarter, the current account balance recorded a deficit of US$ 2.6
billion, equivalent to 1.5% of GDP. The deficit was significantly below
the US$ 4.7 billion registered in the preceding quarter but doubled the
US$ 1.3 billion deficit observed in the first quarter last year. The
higher deficit in the trade balance, prompted by faster export than import
growth, accounted for the deterioration over last year. In the first
quarter, exports increased by 8.4% over the first quarter 2004. Oil
exports, which grew an annual 29.9% in the wake of higher oil prices, were
the key driver behind the increase, with non-oil exports rising a much
more moderate 5.6%. Thus, non-oil exports grew at less than half the
11.4% pace observed in the second half last year. Next to a statistical
effect resulting from Easter holidays, the slower growth of non-oil
exports reflects decelerating external demand and a lower share in U.S.
imports, as the Mexican economy continues to loose market share to its
Asian competitors. Imports increased 11.6% over the first quarter 2004,
down from 16.9% in the second half 2004. The slowdown mainly reflects
less vigorous imports of intermediate goods, which serve as an input to
the export industry. Consumer and capital goods imports continued to grow
strongly. Meanwhile, the surplus in the transfers balance increased from
US$ 3.5 billion in the first quarter 2004 to US$ 4.2 billion in the first
quarter 2005. A 20.5% increase in transfers from Mexicans living abroad
accounted for the widening in the transfers surplus. In the recent past,
these transfers have become an increasingly important source of funding
and in the first quarter, the amount of remittances was equivalent to 70%
of oil exports.
Capital account surplus drops
The capital
account registered a surplus of US$ 3.6 billion in the first quarter,
which was sufficient to cover the current account gap but was well below
the US$ 5.5 billion surplus recorded in the first quarter last year. The
decline in the surplus reflects the absence of a one-time boost to foreign
direct investment in the first quarter last year related to the purchase
by Spanish bank BBVA of outstanding shares in BBVA-Bancomer. This
transaction had resulted in an inflow of US$ 4.2 billion and thus
accounted for the entire decline of foreign direct investment from US$ 8.1
billion in the first quarter last year to US$ 3.8 billion this year. |
