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Economy surprises positively in November,
confirming upward trend
In November,
economic activity increased 6.0% 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 4.3% pace and constituted the
fastest pace registered in four years. In October, the economy had grown
by 4.1%. A month-on-month comparison, confirms the resilience observed
towards the end of the year. According to seasonally adjusted data, the
economy expanded 0.46% over the preceding month, following on a 0.83%
expansion in October. Moreover, the upward trend in the economy remains
intact. In November, the annual average growth rate rose from 3.9% in
October to 4.2% - the thirteenth consecutive increase. The acceleration
over October was broad-based with agriculture being the only sector where
activity decelerated to 4.1% growth over November 2003 from a 6.1%
expansion observed in October. Services, in contrast, expanded by 6.4%
over November 2003, following on 4.8% growth in October.
Industrial sector accelerates in November
amid strong manufacturing and construction
In November,
activity in the industrial sector increased by 5.4% annually. The
November reading converted the 2.0% expansion registered in October -
which had constituted the slowest growth registered since January 2004 -
into a short-lived bout of weakness in an otherwise intact upward trend in
industrial activity. However, within the industrial sector performance
was mixed since some sub-sectors actually decelerated further. Thus,
growth in mining slowed from a 2.5% expansion in October to 1.9% growth in
November. Similarly, activity in the electricity, gas and water sector
declined from a 3.4% to 1.9% pace. The lower dynamism in these two
sectors was compensated for by faster growth in construction and
industrial manufacturing. Construction expanded a strong 6.5% following
5.3% growth in October. The all-important industrial manufacturing
experienced the most pronounced improvement, as the sector resumed the
previous trend to higher growth and expanded 5.8%, following the barely
positive 1.2% expansion in October.
Maquiladora
industry picks up speed but remains short of double-digit expansion seen
earlier last year
The
export-oriented maquiladora industry, which mainly serves the U.S.
market, also picked up. In November, the maquiladora industry
added 6.8% over the same period the prior year, up from 5.3% growth in
October. However, the sector did not return to the recently renewed
resilience. At the beginning of 2004, the maquiladora industry
had recovered from a three-year slump and returned to double-digit growth
in mid-2004. The spotlight is now on December, where the industry will
either resume the strong growth trend or fall back to the more sluggish
growth rhythm.
Leading indicators and consumer confidence
point upward
The leading
and coincident indicators for October, published on 18 January augur well
for a further acceleration in economic activity. The coincident indicator
that tracks the current developments in the economy was up 0.79% over the
preceding month in seasonally adjusted terms. The rise was due to
favourable developments in all categories that comprise the index. The
leading indicator that tries to anticipate future developments in the
economy increased 1.46% over the preceding month, as four of the six
components developed favourably. Consumer confidence also underpins the
more positive outlook. In January, consumer confidence added 2.4
percentage points over December, as the overall index advanced from 102.8
points to 105.2 points. In December, the index had registered the highest
percentage point increase since the National Statistical Institute (INEGI)
began surveying consumer confidence in 2002. The boost to consumer
confidence observed in the past two months lifted the index to the highest
level in more than two years. Moreover, the January increase was
broad-based, as all five sub-categories comprising the index improved over
the previous month, with households’ assessment of the development of the
economy registering the strongest increase (+3.4% over December).
Outlook remains positive
Panellists
believe the economy to have expanded by 3.8% in the final month of last
year, which would leave fourth-quarter growth at 4.6% and would result in
full-year growth of 4.2%. This month’s estimate coincides with
preliminary figures from the Central Bank, which just presented its fourth
quarter inflation report. The report included preliminary growth data
indicating that gross domestic product (GDP) expanded around 4.7% in the
fourth quarter and 4.2% for the full year. Final national accounts data
will be published on 16 February. The Central Bank believes that the
economy will grow between 3.5% and 4.0% this year. 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 3.6% in the second half of 2005. For the full
year, Consensus Forecast panellists expect the economy to grow by 3.7%,
which is up a notch from last month’s forecast. Fears about elections
being followed by a bad year seem to have vanished. For next year, the
Consensus sees economic growth at 3.6% despite the presidential elections
slated for July.
Central Bank tightens reins and moves to
more direct policy to stem rise in inflationary expectations
With headline
inflation having finished at 5.2% last year and having exceeded the upper
limit of the Central Bank’s one percentage point tolerance around its 3.0%
target rate, the Central Bank will have to continue its tightening cycle.
On 28 January, the Central Bank raised its money market "short" (corto)
to 75 million pesos per day from 69 million pesos. An
increase in the corto reduces overnight lending to banks and
indirectly drives up interest rates. This was the first time this year
that monetary authorities have acted to stem rising inflationary
expectations but follows on nine raises in the corto last year.
The Central Bank claimed it wanted to make sure annual salary negotiations
were not affected by high inflationary expectations and also linked its
decision to a tightening in U.S. monetary policy. The U.S. Federal
Reserve (Fed) on 2 February raised the target for the benchmark federal
funds rate by 25 basis points to 2.5% - sixth consecutive increase. The
Fed is likely to continue to tighten the monetary reins at the next
meetings of the Federal Open Market Committee on 22 March and 3 May. On 3
February, the Mexican Central Bank followed suit and announced that it
would raise the seven-day loan lending rate on 7 billion pesos (US$
626.1 million) in bank loans from 9.05% to 9.15%. With this decision,
monetary authorities departed from their traditional policy of letting
commercial lenders set interest rate levels and moved towards the U.S.
Federal Reserve's system of setting a target interest rate. As a result
of the continued tightening, the benchmark 28-day Cetes rate
reached 9.07% on 3 February, the highest rate since March 2003. Consensus
Forecast panellists have maintained their year-end interest rate forecast
at 8.4%. Moreover, the sustained monetary tightening is beginning to show
its effects on inflationary expectations. Consensus Forecast panellists
have lowered their forecasts for year-end inflation for the first time in
12 months. Panellists see year-end inflation at 4.0%, down 0.2 percentage
points compared to last month’s forecast. The forecast for 2006 dropped
0.1 percentage points to 3.9%, just short of the upper limit of the 1%
tolerance margin of the 3% central target rate.
Standard & Poor's raises Mexico's rating
On 31
January, Standard & Poor's Ratings Services (S&P) announced that it raised
the long-term foreign currency sovereign credit rating for Mexico to 'BBB'
from 'BBB-'. The outlook for the long-term rating was set at stable.
According to S&P, the upgrade reflects gradually increasing macroeconomic
stability, attributable to a steady improvement in external liquidity and
deepening domestic financial markets, which has resulted in greater
resilience to potential negative shocks. Furthermore, the improved debt
profile has reduced the risk of volatility in fiscal performance, as
interest payments are likely to decline gradually to less than 12% of
central government revenue in 2005 from nearly 16% in 2001. Moreover, S&P
sees the external position as strengthening amid a greater synchronization
between U.S. and Mexican business cycles and increasing remittances from
Mexicans living abroad. The stable outlook is based upon the expectation
of continued political commitment to moderate budget deficits. |
