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Economy exceeding expectations in December
In December,
economic activity increased 4.4% 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 above Consensus
Forecast expectations of 3.8%, but well below the 6.0% growth observed in
November. A month-on-month comparison suggests an even stronger growth
pace towards the end of last year. According to seasonally adjusted data,
the economy expanded by 0.63% over the preceding month, following on 0.38%
growth in November. That said, the upward trend is flattening as the
annual average growth rate remained virtually unchanged at 4.4%, following
on ten consecutive monthly increases.
Fourth quarter growth above estimates
Owing to the
better-than-expected development in December, the fourth quarter gross
domestic product (GDP) growth of 4.9% exceeded market expectations of 4.6%
in last month’s Consensus Forecast. The fourth quarter pace was 0.3
percentage points faster than the 4.6% annual growth rate observed in the
third quarter and represented the eleventh consecutive quarter of positive
growth, with the last six exhibiting a steady upward trend. According to
seasonally adjusted data, the economy accelerated even more vigorously
than suggested by the annual data, as the National Statistical Institute (INEGI)
reported 1.63% growth over the preceding quarter, following on 0.93%
quarterly growth in the third quarter. For the full year, the economy
expanded 4.4%, ending a string of three years of negative or sluggish
growth.
Services grow
at even quicker pace than in the third quarter
On a sectoral
level, the acceleration observed between the third and the fourth quarter
was the result of strong improvement of the agricultural sector and a more
moderate acceleration of services. The industrial sector, in contrast,
decelerated. Agriculture rebounded from the 1.1% contraction in the third
quarter to a 2.9% expansion owing to an increase in cultivated areas in
the autumn-winter cycle. Services grew 5.6% in the fourth quarter over
the same quarter the year before, following on 5.0% in the third. Faster
growth of commerce, restaurants and hotels, where growth jumped from 4.9%
in the third quarter to 7.0% in the fourth, accounted for the acceleration
in services. According to INEGI, the jump was mainly due to higher sales
volumes related to the external sector and higher hotel occupancy levels.
The transport, storage and communications sector continued to grow at the
same vigorous 9.9% pace observed in the third quarter, as the sector
continued to profit from strong growth of fixed and cellular telephone
line services. Growth in financial services and real estate also
accelerated from 4.4% in the third quarter to 4.7% growth in the final
quarter of last year.
Industrial sector slumps towards end of the
year
Growth of the
industrial sector retreated from the robust 4.8% registered in the third
quarter to 3.6% in the fourth. The reading puts an end to the upward
trend observed since the second quarter 2003, when the sector was mired in
recession. The slowdown seized three of the four sub-sectors that compose
industry: Mining slowed from an already sluggish 1.6% pace in the third
to flat growth in the fourth quarter; construction, on the other hand,
experienced a slight acceleration in activity, as growth inched up from
the 5.9% pace in the third to 6.0% growth in the fourth quarter; while
electricity, gas and water decelerated from 2.6% growth to 0.8%. Finally,
growth in industrial manufacturing slowed from 5.0% to 3.6%. The slowdown
was mainly due to a bout of weakness in October, when growth plummeted to
a paltry 1.0% year-on-year expansion. Subsequently, the sector
recovered. In particular, the important export-oriented maquiladora
industry, which mainly serves the U.S. market, once again reached
double-digit growth in December, temporarily quelling lingering concerns
that a drop-out of U.S. demand for Mexican manufactures could send the
sector into a severe slump.
Leading indicators point downward but
consumer confidence surges to historic high
Consumer
confidence and leading indicators provide a mixed picture of the immediate
outlook for the economy. The leading and coincident indicators for
November, published on 15 February dropped in unison for the first time
since June last year. The coincident indicator that tracks the current
developments in the economy was down 0.61% over the preceding month in
seasonally adjusted terms while the leading indicator that tries to
anticipate future developments in the economy decreased 0.85% over the
preceding month. Consumer confidence, in contrast, increased yet again.
In February, the overall index of consumer confidence reached 107.9
points, up from 105.2 points in January. While only a small increase, the
February reading continues a series of rising consumer observed confidence
since December last year, which took the overall level to the highest
value registered since Central Bank and INEGI have started elaborating
data in January 2002. With the exception of the perception of the future
economic state of the country all five sub-categories that make up the
overall consumer confidence increased over January, most also reaching an
historic maximum. Households’ plans to purchase durable consumer were
particularly buoyant, suggesting that an acceleration in private
consumption will be sufficient to compensate for a slack in the external
sector.
Consensus remains upbeat about economic
prospects
The
better-than-expected fourth quarter reading and the strong consumer
confidence have prompted Consensus Forecast panellists to maintain their
forecasts for economic growth this year unchanged at 3.7% despite the
worsening international setting. In addition, the panel hiked the growth
prospects for next year a notch from last month’s 3.6% to the current
3.7%.
Current account deficit deteriorates in
fourth quarter amid higher trade deficit
In the fourth
quarter, the current account balance recorded a deficit of US$ 4.6
billion, equivalent to 2.5% of GDP. The deficit was more than double the
US$ 1.8 billion deficit registered in the preceding quarter and was
significantly above US$ 2.9 billion deficit (1.7% of GDP) observed in the
fourth quarter 2003. The actual reading remains below last month’s
Consensus, which had the deficit at US$ 4.9 billion. A higher trade
deficit accounted for the deterioration in the current account balance
compared to the fourth quarter 2003. The services balance remained
virtually unchanged over last year, while a higher surplus in the
transfers balance partly compensated the higher deficit in the trade
balance. The transfers surplus increased from US$ 3.5 billion in the
fourth quarter of 2003 to US$ 4.3 billion in the fourth quarter 2004. The
increase mainly reflected higher transfers from Mexicans living abroad.
These transfers grew by 25.4% to US$ 4.2 billion in the fourth quarter
compared to the same quarter the prior year. In the recent past,
remittances have become an increasingly important source of funding for
Mexico. In 2004, remittances reached US$ 16.6 billion, which was the
equivalent to 78% of oil exports or 2.5% of GDP. As a result of the final
quarter reading, the current account balance registered a deficit of US$
8.7 billion in 2004, which was virtually unchanged over 2003. Reflecting
increasing domestic demand on the one hand and less dynamic global demand
on the other hand, Consensus Forecast panellists have continued to push up
their forecast for this year’s current account deficit from last month’s
US$ 11.6 billion to the current US$ 12.6 billion.
Central Bank continues to tighten reins
despite sharp drop in January inflation
With headline
inflation having finished at 5.2% last year and thus once again above the
upper limit of the Central Bank’s one percentage point tolerance around
its 3.0% target rate, the Central Bank is stepping up the effort to rein
in inflationary expectations. Consequently, monetary authorities continue
to tighten the reins even though annual headline inflation has dropped by
0.7 percentage points since December to 4.5% in January. On 25 February,
the Central Bank raised its money market "short" (corto) to 77
million pesos per day from 75 million pesos. An increase in
the corto reduces overnight lending to banks and indirectly drives
up interest rates. This was the second time this year that monetary
authorities have acted to stem rising inflationary expectations and
follows on nine increases 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% - the sixth consecutive increase. The Fed is likely
to continue to tighten the monetary reins at upcoming meetings of the
Federal Open Market Committee on 22 March and 3 May. As a result of the
Mexican Central Bank tightening, the benchmark 28-day Cetes rate
reached 9.33% on 3 March, the highest level registered since March 2003.
Consensus Forecast panellists believe that monetary authorities have to
maintain the current tightening cycle throughout the year and have lifted
their year-end interest rate forecast by 0.3 percentage points to 8.7%.
The Consensus Forecast for year-end 2005 inflation remained unchanged at
4.0%. Nevertheless, the tightening is bearing fruit, as the inflation
forecast for 2006 dropped 0.1 percentage points over last month to 3.8%,
just below of the upper limit of the 1% tolerance margin of the 3% central
target rate. |
