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Economic
activity decelerates sharply
In May, economic activity increased a weak 1.0% over the same month last
year, according to the global indicator for economic activity (IGAE,
Indicador Global de la Actividad Económica). The reading was only a
fraction of the 6.5% expansion registered in April and also came in below
market expectations, which had anticipated economy activity growing 1.8%
annually. The deceleration over the previous month was broad-based, with
all three main economic sectors slowing over April. The services sector
experienced the sharpest slowdown and contracted 2.2% annually (April:
+6.7% year-on-year). Industry also contracted but less pronouncedly,
declining 1.2% annually, down from the 5.5% growth registered in the
previous month. Finally, the agriculture sector slowed down and increased
5.7% (April: +7.2% yoy). A month-on-month comparison, however, does not
corroborate the slowdown suggested by the annual figures, as economic
activity expanded 0.34% over the preceding month in seasonally adjusted
terms, which contrasted the 0.15% contraction registered in April. As a
result of the weak May reading, the annual average growth rate stepped
down a notch, from 3.6% in April to 3.5%.
Consumer
confidence hits record low
Sluggish
growth in the United States continues to affect the Mexican economy. In
particular the important manufacturing sector is suffering, as shown by
the latest industrial production figures (-1.2% annual growth in May).
Nevertheless, exports continue to defy expectations and are maintaining a
robust growth pace, as non-U.S. destinations are picking up the slack from
weaker demand from the United States. In the second quarter, export
growth reached a strong 17.3%, up from the 16.4% annual growth seen in the
first quarter.
On the
other hand, the domestic side of the economy is showing mixed results,
with the overall balance pointing downwards. In July,
the tendency
indicator (IAT, Indicador Agregado de Tendencia) that gauges the
assessments of companies about production, plant utilisation, domestic
demand for their products, exports and personnel, rose from 50.3 points in
June to 51.9. On the other hand, the producer confidence indicator (ICP,
Indicador de Confianza del Productor) which measures the
preferences for investment and the assessment of the current and future
state of both the company and the economy, dropped from 47.4 points in
June to 45.3. Furthermore, consumer confidence fell for the fourth
consecutive month, dropping from 90.7 points in June to 88.4, which marks
the lowest level since the index was first published in 2001. The decline
in consumer expectations was broad-based and reflected deteriorating
perceptions about both the current and the future state of the economy.
Despite the adverse economic environment, the Ministry of Finance recently
stated that the economy probably expanded above 3.0% in the second
quarter, as the slowdown in the United States had a smaller impact than
initially expected. The Ministry of Finance expects the economy to grow
2.8% this year, while the Central Bank anticipates GDP growth to be
between 2.25% and 2.75% (recently revised downwards from the previous
2.40%-2.90% estimate). Consensus Forecast panellists expect the economy
to grow 2.5% this year, which is 0.1 percentage points down from last
month’s forecast. For 2009, the panel anticipates economic activity to
step up to 2.9%.
Central Bank raises inflation forecasts
In July,
consumer prices increased 0.56% over the previous month, which was up from
the 0.41% price rise registered in June. The reading came in broadly in
line with market expectations, which had anticipated prices adding 0.51%
over the previous month. Higher prices for food, beverages and tobacco as
well as for education and leisure were the main drivers behind the monthly
price rise. As a result of the monthly reading, annual headline inflation
stepped up a notch, from 5.3% in June to 5.4%, which is the highest rate
since November 2004. The core inflation index, which excludes more
volatile categories such as oil, fresh fruits and vegetables, added a more
moderate 0.40% over the previous month. As a result, annual core
inflation inched up from 5.0% in June to 5.1%. Thus, both headline and
core inflation remain well above the Central Bank’s long-term inflation
target of 3.0% and even exceed the upper limit of the ±1.0% tolerance
margin. Amid the strong inflationary pressures, on 18 July, the Central
Bank decided to lift the benchmark interest rate for the second
consecutive month by 25 basis points to 8.00%. Bank’s Governor Guillermo
Ortiz stated that even if energy and food prices ease, strong inflationary
pressures persist and that the monetary authorities’ primary task is to
anchor expectations and avoid second-round effects. Later, on 30 July,
the Central Bank announced its new inflation forecasts for the 2008-2010
period. The Bank revised its inflation projections significantly upwards
amid higher than expected commodity prices, and now expects inflation will
average between 5.5 and 6.0% in the final quarter of the year, up from its
previous forecast of 4.25 to 4.75%. The Bank anticipates price pressures
to moderate next year, with inflation reaching between 3.5% and 4.0% in
the fourth quarter of 2009. Consensus Forecast panellists anticipate
headline inflation moderating slightly to 5.0% by the end of this year,
which is 0.4 percentage points above last month’s forecast. For 2009, the
panel expects inflation to decelerate further to 3.8%. |
