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Industrial production accelerates in spite
of slower mining
Data for
economic activity in October will not be published until 10 January.
However, recent indicators suggest that the actual outcome will be on the
lower end of expectations that range from 3.2% to 5.5%. In October,
industrial production expanded 2.6% over the same month last year. While
the October reading more than doubled the 1.2% growth registered in
September, the rebound highlights the limited potential of the industrial
sector. In spite of strong demand in the United States, which absorbs
more than 90% of Mexican exports, the industrial sector that once
constituted the country’s key growth engine is failing to ignite. The
lacklustre growth of the industrial sector - since 2001 annual growth has
fallen short of 0.5% - reflects the constant erosion of market share to
Asian competitors, mostly China. That said, seasonally adjusted data
paint a somewhat more optimistic picture. According to seasonally
adjusted data, industrial production added 0.71% over the preceding
month. Moreover, the October reading stemmed the steady downward trend in
the growth observed in the past months. In October, the annual average
growth rate inched upwards 0.1 percentage points from 1.7% in September to
1.8%, the first up-tick in industrial production after five consecutive
declines. Consensus Forecast panellists maintained last month’s estimate
for full-year industrial production growth in 2005 at 2.3%. Moreover,
lack of structural reforms and continued competitive pressure from Asian
manufacturing hubs will limit growth at 3.4% in 2006.
Unemployment declines but retail sales and
consumer confidence point towards weaker consumption growth
Unemployment
continued to decline from 3.6% in October and 3.0% in November. However,
in part seasonal effects accounted for the decline. Moreover, erratic
shifts render the headline unemployment figure a somewhat unreliable gauge
of current economic developments. Retail sales data, on the other hand,
support the less propitious picture suggested by industrial production.
In October, retail sales increased 3.8% over the same month the year
before. The reading fell short of expectations and was well below the
5.2% expansion observed in September. Seasonally adjusted data support
the slump in retail sales implied by annual data, as sales dropped 0.25%
over the preceding month, the first decline since May 2005. Moreover, the
October reading continued a trend to slower retail sales growth. The
annual average growth rate dropped from 3.2% in September to 2.7% in
October, the ninth consecutive month of declining growth. Finally,
consumer confidence, which had increased in September and October,
declined. In November, the consumer confidence index reached 102.7
points, which was 0.6 percentage points below the October reading. Only
two of the five sub-indices of the overall consumer confidence index
declined. However, households’ plans to purchase durable consumer goods
plummeted more than 6% over the preceding month, which does not bode well
for the holiday shopping season and could provide for a sudden and
unexpected dent in private consumption in the final quarter of the year.
In spite of the less propitious data, Consensus Forecast participants have
maintained their estimate for last year’s economic growth unchanged over
last month at 3.1%. Moreover, the panellists see the diminished growth
momentum from this year providing a less solid backdrop for 2006 and
expect GDP growth to remain limited at 3.4%.
Exchange rate resumes depreciation
In December,
the Mexican peso reversed the appreciation observed during November
and depreciated by 0.6% in nominal terms versus the US$ compared to the
end of November. In spite of the slight depreciation of the peso
in the final month of the year, the currency appreciated 4.9% nominally
versus the US$ last year. Between mid-August and mid-October, the peso
experienced a period of high volatility that prompted the exchange rate to
weaken substantially (from 10.59 to 10.95). However, during most of last
year the peso had experienced a continuous appreciation. One of
the main determining factors for the recent weakening in the exchange rate
was the different monetary policy setting in the United States and
Mexico. Whereas in the United States, the Federal Reserve continued to
tighten policy, the Mexican Central Bank loosened the strings motivated by
a strong drop in headline inflation. The interest rate cuts implemented
by Banco de Mexico since August 2005, rendered investments in
Mexican government papers less attractive and have thus countered the
appreciation trend observed earlier last year. On the other hand, the
strong oil price helped buttress the currency, as it bolstered US$ inflows
and filled the coffers of the public sector. In 2005, the average oil
price was 35.2% above the level observed in 2004. However, the oil price
is unlikely to rise substantially this year and, in contrast, the tighter
policy setting in the United States should exert further downward pressure
on the exchange rate. As a result, Consensus Forecast panellists
anticipate the Mexican currency to depreciate by 4.8% this year to finish
2006 at 11.44 pesos to the US$.
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