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Economy disappoints in November …
The economy presented itself in a weak condition towards the end of 2002.
In November, the monthly indicator for economic activity (IGAE, Indicador
Global de la Actividad Económica) rose only 0.9% in real terms compared
with the same month in 2001. The reading remained well below expectations,
which had seen the economy adding 1.5% over the same period and
represented the weakest growth rate registered for a month in the second
half of last year. Moreover, according to seasonally adjusted data, the
economy actually declined 0.75% over the preceding month, which was the
worst performance in 2002. The dismal November performance dashed hopes
that the Mexican economy would finally pull clear from its anaemic growth
path, which has held a grip over the country over the last two years.
Optimism about a recovery had run high in the first half of 2002, when the
seasonally adjusted indicators had shown a continuous upward movement in
the economy and the U.S. economy seemed to resume its role as the
locomotive of the Mexican economy via a strengthening of demand for
Mexican manufactures. But a weakening of U.S. manufacturing in the second
half of 2002 quickly spilled over to the Mexican economy, prompting the
tentative recovery to ebb before being able to take a firmer grip.
… as industry slumps
The dismal performance of the industrial sector in 2002 was again
reflected in November, which otherwise saw services activity expanding
2.4% annually and agriculture output dropping 6.9%. After 1.3% growth in
October 2002, industrial activity dropped 0.5% in November compared to the
same month in 2001. With the exception of construction, all sub-sectors
comprising the industrial sector weakened compared to October. The
manufacturing industry declined by 1.3% (October: +1.5% year-on-year), as
the domestic side of the industry dropped by 1.5%, which was only
partially offset by a 0.3% increase in the maquiladora industry. Even
though the growth in the maquiladora industry represents a slowdown from
the 1.6% expansion observed in October, the performance is remarkable,
since it represents the second consecutive month of positive year-on-year
growth in that sector and contrasts with the crippling double-digit
contractions seen in the first half of 2002. Mining also developed
favourably, adding 3.2% on an annual basis. The improvement was driven by
an increase in non-oil mining (+12.4% yoy) but mitigated by a decline in
the oil industry (-2.9% year-on-year). Construction grew 1.7% and the
electricity, gas and water sector added 1.2% compared to the same month in
2001.
Growth estimate lowered for 2002 amid dismal November results
Despite the dismal November performance, Consensus Forecast panellists are
upbeat that the economy picked up steam in the final month of the year,
seeing growth of the monthly indicator for economic activity at 2.5% on
average. Nevertheless, the November dent has affected fourth quarter
estimate, which has been lowered from 2.5% last month to 2.3%. Forecasts
for the year as whole were remained unchanged from last month at 1.1%, in
line with the latest Central Bank estimate, presented in the quarterly
inflation report published late January.
Central Bank sees pickup in consumption in first half of the year and
further acceleration in the second
For 2003, monetary authorities see four principal factors shaping the
development of the economy. First, the recovery of the U.S. economy, in
particular its industrial sector, would affect Mexican external and
industrial sectors favourably. This would lift domestic consumption and
investment. In particular, monetary authorities expect consumption to pick
up at the beginning of 2003, gaining further speed throughout the
remainder of the year, as formal employment picks up and consumer credit
expands. Second, the development of the oil price will be key to economic
developments by affecting the export level and fiscal accounts. Third,
Mexico’s conditions of access to internal financial markets, which will be
key for the government/businesses to ….. And finally, the progress in
structural economic reforms, such as the reform of the electricity sector
and tax reform, which are considered tantamount to more sustainable longer
term growth. Given the anticipated pattern of the consumption recovery,
the Central Bank anticipates growth to average 2.5% in the first half of
the year (Consensus: 2.9%), advancing one percentage point to 3.5% in the
second half (Consensus: 3.8%). For the year as a whole, monetary officials
expect the economy to grow around 3.0%, which is a notch less optimistic
than the current 3.1% estimate of the Consensus.
Slower U.S. recovery and inflationary pressures identified as major
downside risks for growth in 2003
Next to the baseline scenario, the inflation report highlights the major
downside risks for economic expansion in 2003. The Bank identifies a
slower recovery of the U.S. economy or, in the worst case, a slump back
into recession as the major external risk. The Central Bank believes that
a prolonged military conflict in Iraq, a quick drop in consumer spending
in the wake of a negative wealth effect and/or a rapid adjustment of the
current account deficit with detrimental side effects on international
capital markets could trigger a US slowdown. In addition, monetary
authorities believe that further financial or political crisis in the
region or higher international instability could also serve to dry up of
capital flows to Mexico. On the domestic side, the Central Bank sees risks
in a gradual advancement on structural economic reforms with detrimental
impacts in the medium to long term and a slower growth in formal
employment, which would slow the consumption recovery. On the monetary
side, the slow adjustment of wage contracts to lower inflation rates,
which are in particular affecting salaries in the services sector, is
considered a key risk. Finally, the rapid weakening of the peso could feed
through to rising inflationary pressures, which would have to be countered
by a tighter monetary policy.
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