Mexico - Economic Briefing December 2003

Economy Slumps Despite Record Growth in U.S.

The Mexican economy has lost its link to the U.S. economy, which has driven economic development over the past decade. Despite record U.S.growth, the Mexican economy continues to ail along, barely remaining in positive territory. Recent data suggest that the U.S. manufacturing sector, which had lagged behind the overall economy, is beginning to recover at a more pronounced pace. However, rising competition from China and other manufacturing hubs could jeopardise the possibility of a Mexican recovery in the wake of a rebound in U.S. manufacturing.

Economy grows below expectations in September
In September, economic activity increased 1.2% 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 once again below expectations, which had the economy growing at an annual rate of 2.4%. According to seasonally adjusted data, the economy barely expanded at all, with the economy “growing” 0.04% over the preceding month. Nevertheless, the September reading was above the August performance (-0.7% year-on-year) and all sectors improved over the preceding month. Agriculture increased at an annual rate of 7.6% (August: -1.6% yoy) and services added 2.0% over the same month last year (August: +0.6% yoy). The industrial sector dropped 0.6% (August: -2.9% yoy).

Economy ailing along in third quarter despite record growth in United States
Because of the below-expectations September reading, the third quarter performance also remained significantly below estimates. In the third quarter, the economy expanded by 0.4%. On an annual basis, this meagre reading is still twice the 0.2% growth rate of the second quarter. However, seasonal factors distort the result. According to seasonally adjusted data, the economy actually contracted 0.36% over the preceding quarter compared to 1.19% growth in the second quarter. While below expectations, the third quarter slump confirms the underlying trend discussed in previous editions of the LatinFocus Consensus Forecast, namely, that the Mexican economy is lagging far behind the rebound observed in the United States. In fact, the distance could hardly be bigger. In November, third quarter growth estimates for the United States were revised upwards from the already buoyant 7.3% to 8.2%. This represents the highest growth rate in almost two decades and stands in stark contrast to the ailing Mexican economy. What is most concerning, however, is that the recovery in the United States is also seizing the manufacturing sector, which so far had lagged behind the rest of the economy. With the Mexican economy depending mostly on U.S. demand for manufactures, this de-linking development is disconcerting as it suggests that relocations of manufacturing activities to China are having a larger effect on the overall economy than anticipated.

Manufacturing worst performing sector
The de-linking of U.S. and Mexican industries is reflected in manufacturing. In the third quarter, manufacturing was the weakest sector of the economy, as activity declined 3.6% over the same period last year. The third quarter industry reading is better than the 4.6% contraction observed in the second quarter. However, just as for the overall economy, seasonal factors misrepresent actual developments. According to seasonally adjusted data, the manufacturing industry contracted 1.1% over the preceding quarter, following on a 0.1% decline in activity in the second quarter. Moreover, the maquiladora industry, which mainly serves the U.S. economy, deteriorated on an annual basis from a 0.6% contraction in the second quarter to a 4.1% decline in the third. This suggests that the manufacturing sector and the Mexican economy as a whole will continue to face an adverse environment. The persistent slump in the manufacturing industry is dragging down the entire industrial sector. In the third quarter, industry as a whole, which also comprises mining, construction as well as electricity, gas and water, declined 2.0% over the same quarter last year, following a 3.0% contraction in the second quarter.

Services grow at slightly faster clip than in the second quarter
Services, in contrast, expanded 1.5% over the third quarter 2002, slightly better than the 1.3% growth observed in the second quarter. The improvement was notable in all sub-sectors except public services, which contracted 0.4%, following on 0.9% growth in the second quarter. Financial services experienced the strongest expansion, adding 4.2% over the same quarter last year (Q2: +3.9% yoy) and transport, storage and communications services gained 2.7% (Q2: +1.0% yoy), amid robust growth in telephone services. Commerce, restaurants and hotels left the 0.3% decline observed in the second quarter behind and expanded 0.4% in the third quarter. According to the National Statistical Institute (INEGI), the positive development was due mostly to higher domestic sales activities, particularly in manufactures destined to external markets.

Outlook continues to deteriorate
With activity in the manufacturing industry subdued, the outlook for the Mexican economy remains clouded. Consensus Forecast panellists sliced another 0.3 percentage points from the fourth quarter growth forecast to the current 2.0% growth. As a result, the full year projection also dropped a notch compared to last month’s projection to 1.4%, continuing the trend of deteriorating prospects that has characterised the whole year. Moreover, the de-linking of the Mexican and U.S. economy is overshadowing the outlook for 2004. Despite improving growth prospects for the United States, the outlook for Mexican GDP growth dropped 0.2 percentage points compared to last month’s projection to 3.3%.