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Economy disappoints but upward trend
remains intact, as …
In May,
economic activity increased 3.7% 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 below
expectations, which had the economy growing at an annual 4.9% pace and was
also below the 4.8% annual growth rate recorded in April. However, a
month-on-month comparison, does not confirm the slowdown suggested by the
year-on-year data. According to seasonally adjusted data, the economy
expanded a strong 0.79% over the preceding month, following on the modest
0.08% monthly expansion in April. In fact, the May expansion represented
the fastest monthly pace since March 2004. Moreover, the upward trend
observed during the past three months remains intact. In May, the annual
average growth rate inched upwards 0.1 percentage points from 4.0% in
April to 4.1%.
… industry and services experience a marked
slowdown
In May,
agriculture accelerated but both industry and services experienced
slowdowns compared to the preceding month. Agriculture grew at an annual
rate of 3.9% (April: +1.5% year-on-year) and services added 4.3% over the
same month last year (April: +5.1% yoy). The industrial sector increased
3.0%, a considerable slowdown compared to the 5.2% expansion observed in
April. The slowdown in the industrial sector was mostly concentrated in
the all-important manufacturing industry, with the remaining three of the
four sub-sectors surveyed by the National Statistical Institute (INEGI),
namely mining, construction and electricity, gas and water either
accelerating or experiencing only minor slowdowns. Mining expanded a
strong 4.0% over May 2004, following on 2.5% annual growth in April. The
acceleration was due to faster growth in non-oil mining production whereas
oil and gas output grew less dynamically.
Manufacturing industry slumps but is likely
to pick up amid improvement in U.S. industry
Growth in
construction dropped from a strong 6.5% observed in April to 5.1% and the
electricity, gas and water sector slipped slightly from 1.0% growth in
April to 0.8% in May. The all-important industrial manufacturing
decelerated at a more pronounced pace, as growth halved from a strong 5.4%
observed in April to 2.7%. However, the longer term accelerating trend
remained intact, with the annual average growth rate of the manufacturing
industry advancing from 3.2% in April to 3.3% in May. Moreover, the U.S.
manufacturing industry, the key determinant for the development of the
Mexican counterpart, is showing signs of improvement. In June, industrial
production rose 0.86% over the preceding month in seasonally adjusted
terms and 3.9% over June 2004. The monthly June increase was the largest
observed since February 2004, as utilities output rose sharply in the wake
of warmer-than-usual temperatures. More recent data suggest that the U.S.
industry will improve further. In July, the Institute for Supply
Management (ISM) Purchasing Managers' Index (PMI) indicated that economic
activity in the U.S. manufacturing sector continued to grow.
The PMI for July registered an increase of 2.8 percentage points compared
to the June reading of 53.8 points. With 56.6 points in July, the PMI has
now spent
26 consecutive months
above
the
50-point threshold that separates an expansion from a contraction. After
hitting a
low point in May, the sector rebounded strongly in June and
July amid stronger growth in new orders and production. Given the
stronger impetus from the U.S. industrial sector, Consensus Forecast
panellists are increasingly upbeat about the prospects for industrial
growth in Mexico. However, with 3.5% industrial output growth expected
for this year and 4.0% for next, the potential for expansion is clearly
limited compared to the past, when the industrial sector had grown above
7% per year in the wake of the recovery from the peso crisis in
1995.
Medium-term growth potential of industrial
sector limited by strong competition from China
Growth is
unlikely to return to these healthy levels of the past in the foreseeable
future. In fact, the Consensus Forecast expects the industrial sector
growth not to exceed 4.2% annually during the next five years. Increasing
competition from China and other manufacturing hubs in Asia, above all,
account for the limited growth potential in Mexican industry. According
to the latest trade data, Mexico has been loosing market share in the
vital U.S. market, which absorbs more than 90% of exports. In 2002, when
Mexico’s market share peaked at 11.6%, it commanded a clear advantage
compared to China’s 10.8% share. Only one year later, China had taken the
top position from Mexico and the trend continued in the following years.
In the first five months of this year, Mexico’s share of total U.S.
imports dropped to 10.4% from 10.9% in the same period last year.
Simultaneously, China increased its share in the U.S. from 12.1% in the
first five months in 2004 to 13.5% in the first five months this year. A
comparison of the export growth rates of the two economies to the U.S.
illustrates the momentum behind the development. While China’s exports to
the United States. increased 27.9% year-on-year in the January to May
period, Mexico’s exports increased only 8.7%. Moreover, in part, higher
oil prices inflated Mexico’s export growth to the United States.
Excluding oil exports, the export growth rate was even a lower 6.2%.
Mexico is likely to continue to loose market share to China. In the
inflation report from 27 July, the Central Bank published the results of a
survey among major companies with direct investments in Mexico. The
results of the survey suggest that Mexico will continue to loose market
share, as an increasing number of foreign companies are relocating
manufacturing activities to China. Of the companies that also have
investments in China, 42% claimed that they had channelled investment
flows from Mexico to China during the past three years. Mostly, the
companies were lured away by the lower production costs, which are mainly
determined by wages. However, other factors, such as market size and
support from authorities in the investment process also played an
important part in investors’ decision to move to China.
Outlook improves amid sound developments in
the second quarter
The immediate
prospects for the entire economy remain solid. According to government
estimates from 1 August, the economy expanded around 4.0% annually in the
second quarter, in line with the Consensus that had the economy growing by
4.1%, according to last month’s forecast. In the first quarter, GDP
expanded by 2.4% year-on-year. Official second quarter data for gross
domestic product (GDP) will be published on 16 August. However, the
preliminary estimates from the government suggest that the domestic
economy, particularly investment and to a lesser extent solid growth of
private consumption, drove economic growth. Finance Ministry officials
expect economic growth to
pick up in
the second half of the year, as U.S. demand rises while job growth and
bank lending continue to drive domestic consumption. According to the
latest government estimates, the economy will accelerate from the 3.3%
pace in the first half of the year to 3.8% in the second half of 2005.
The Consensus is a notch more sceptical, expecting the economy to expand
by 3.4% in the second half of the year, with full-year growth reaching
3.6%. However, the Consensus Forecast is at the upper end of the current
assessment of the Central Bank, which on 27 July lowered its full-year GDP
growth forecast from 4.0% expected previously to a range of 3.25% to
3.75%. Monetary authorities cited lower external demand for Mexican
exports and a loss of market share in the United States to other countries
as the key reasons for the downward adjustment to the original estimate.
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