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Economy surprises positively in October
despite weak industry, confirming upward trend
In October,
economic activity increased 3.9% over the same month in 2003, according to
the global indicator for economic activity (IGAE, Indicador Global de
la Actividad Económica). The actual reading was above expectations,
which had the economy growing at an annual 3.5% pace, following on weak
industrial production data published earlier. In September, the economy
had grown by 4.5%. A month-on-month comparison, does not confirm the
slowdown. According to seasonally adjusted data, the economy expanded
0.70% over the preceding month, following on a 0.04% contraction in
September. Moreover, the upward trend in the economy remains intact. In
October, the annual average growth rate moved upwards from 3.6% in
September to 3.9% - the twelfth consecutive increase. While industry
slowed down over September, both agriculture and services picked up speed,
compensating for the weaker industrial sector.
Industrial sector experiences strong
deceleration in October
In October,
activity in the industrial sector increased by a paltry 1.8%, less than
half the pace expected by the market. The reading also represented a
major slump compared to the 5.6% growth recorded in September and in fact
constitutes the slowest growth registered since January 2004. The
deceleration in the industrial sector was broad-based and actually seized
all four sub-sectors surveyed by the National Statistical Institute (INEGI),
with the exception of electricity, gas and water, which continued to grow
at the same 3.4% pace observed in September. Growth in mining dropped
from 3.7% in September to 2.6% in October and construction slowed from
8.5% to 5.4% over the same time frame.
Manufacturing industry continues
accelerating trend despite major slump in October
The
all-important manufacturing industry experienced the most notable
slowdown, as growth receded from a 5.3% pace in September to just 0.9% in
October. The slowdown seized both the export-oriented maquiladora
industry, which mainly serves the U.S. market, and the manufacturing
industry oriented towards the domestic market. The maquiladora
industry, which had recovered from a three-year slump at the beginning of
2004 and returned to double-digit growth in mid-2004, retracted to a
dismal 4.7% expansion, following on 13.1% growth in September. The
manufacturing industry producing for the domestic market barely remained
in positive territory, as growth slipped from 4.6% in September to 0.6% in
October. However, despite the disappointing October slowdown, industrial
manufacturing continued the underlying acceleration trend observed since
November last year. In October, the annual average growth rate of
industrial manufacturing inched upward by 0.3 percentage points from 2.8%
in September to 3.1% in October. That said, Consensus Forecast panellists
have lowered their estimate for industrial growth in the final quarter
from 4.5% expected last month to the current 4.2%. Moreover, the
unexpected slump observed in October has also eaten into the annual
forecast for last year, as some panellists believe that rather than merely
representing a soft spot, the October weakening augurs for more sustained
weakening. In the first half of this year, industry is expected to expand
4.4%, down from 4.5% expected last month, with full year industrial output
growth is seen at 4.1%. While still robust, the pace is far from the
exuberant past in the wake of the recovery from the peso crisis in
1995, when the industrial sector had expanded above 7% a year before
entering in crisis 2001. These growth rates are unlikely to return, as
Mexico appears to be gradually losing attractiveness as a manufacturing
hub compared to competitors in China and Southern Asia.
Consumer confidence surges in December
Consumer
confidence, in contrast, suggests a more positive outlook. Consumer
confidence surged in December, as the overall index advanced from 95.3
points in November to 102.8 points. The 7.8 percentage point increase was
the highest registered since the National Statistical Institute (INEGI)
began surveying consumer confidence in 2002. Moreover, the increase was
broad-based, as all five sub-categories comprising the index increased
over the previous month. The households’ willingness to purchase durable
consumer goods registered the strongest increase (+21.0% over November).
Outlook remains robust owing to favourable
global backdrop
Owing to the
mixed picture suggested by the latest data releases, Consensus Forecast
panellists have maintained their prospects for the remainder of last year
and 2005 unchanged. In addition to the favourable global setting, the
buoyant outlook for the U.S. economy should provide a solid backdrop for
continued recovery in Mexico. Panellists believe the economy to have
expanded by 4.2% in the final quarter of the year, resulting in full-year
2004 growth of 4.1%. According to the Consensus, the economy will
maintain the current expansion pace, growing by 4.1% in the first quarter
this year, subsequently losing steam to 3.8% in the second quarter and
3.5% in the second half of 2005. For the full year, Consensus Forecast
panellists expect the economy to grow by 3.6%, which is unchanged from
last month’s forecast. In addition, the prospects for an upward surprise
in economic growth seem less favourable. The increased competition from
China in Mexico’s prime export markets and the inability of the Fox
administration to implement much-needed economic reforms in the run-up to
the presidential elections in July 2006 remain key obstacles to the
establishment of a more resilient economic growth trend.
Headline inflation declines in December but
rate overshoots Central Bank target rate significantly
In December,
consumer prices increased 0.21%. The actual rate was slightly above
market expectations, which had prices growing by 0.16%, according to last
month’s Consensus Forecast. However, the December reading was well below
the average increase of 0.75% observed over the past four months. Higher
prices for housing, transport and education constituted the main drivers
behind the December increase, mitigated by declining prices for apparel
and shoes. As a result of the relative price stability observed in
December, annual headline inflation declined from 5.4% in November to
5.2%. The core inflation index increased by 0.30% in December and annual
core inflation remained unchanged at 3.8%. Even though headline inflation
remains far above the upper limit of the Central Bank’s one percentage
point tolerance around a 3.0% target rate, the core inflation rate is
still within the established tolerance limits. Consensus Forecast
panellists expect headline inflation to overshoot the Central Bank’s
target again this year, with a year-end rate reaching 4.2%.
Exchange rate appreciated slightly versus
the US$ in 2004
The Mexican
peso closed the year at 11.15 pesos versus the US$, which
represents a nominal appreciation of 0.7%. The virtual exchange rate
stability in the year-on-year comparison hides the fact that the exchange
rate experienced sizeable ups and downs throughout last year with a rather
stable depreciation period in the first half of the year, culminating in a
peak in the exchange rate of 11.69 pesos to the US$ in May. The second
half of the year was characterised by higher volatility with an underlying
appreciation trend, resulting in the slight appreciation for 2004. This
year, Consensus Forecast panellists expect the peso to depreciate
by 5.7% in nominal terms, closing the year at 11.82 pesos to the
US$. |
