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Economy picks up speed in fourth quarter
A more
complete data set for national accounts data confirmed the 4.9% annual
fourth quarter growth reported last month. The reading represents an
improvement compared to the 4.6% expansion registered in the third quarter
and confirms the continuous acceleration trend observed since mid-2003.
Full-year growth in 2004 was 4.4%.
Strong domestic demand compensates for
weaker contribution from external sector
Stronger
domestic demand was the key driver behind the improvement in fourth
quarter growth compared to the preceding quarter. The contribution from
the external side of the economy, in contrast, diminished. Total
consumption accelerated from 5.1% in the third quarter to 6.0% in the
fourth. The improvement was almost entirely due to private consumption,
which accelerated from 5.8% in the third quarter to 7.0% in the fourth
amid particularly strong durable consumer goods purchases. Government
consumption also improved but remained in negative territory, as the
sector contracted 0.9% following on the 1.1% contraction in the third
quarter. Gross fixed investment grew at a very robust 10.9% pace,
following on 8.5% growth in the third quarter. The double-digit expansion
registered in the final quarter continued a steady improvement observed
throughout last year and in fact represented the fastest pace in more than
four years. The acceleration mainly reflected resilient investment
activity in machinery and equipment, whereas construction investment
continued to grow at a more moderate pace. The contribution of the
external sector diminished, as export growth slowed from 12.4% in the
third quarter to 10.3% in the fourth and imports growth accelerated from
10.4% to 11.9%.
Year-end economic boost wanes in January
The positive
developments in the fourth quarter did not carry over fully into this
year. In January, economic activity increased 4.0% over the same month
the year before, according to the global indicator for economic activity (IGAE,
Indicador Global de la Actividad Económica). The actual reading
was only a notch short of last month’s 4.1% Consensus Forecast but more
notably down from the 4.4% growth registered in December last year.
According to seasonally adjusted data, the deceleration between December
and January was more pronounced, as the economy expanded 0.19% over the
preceding month, following on 0.62% monthly growth registered in
December. That said, the upward trend remains intact, as the annual
average growth rate accelerated from 4.4% to 4.5%, the twelfth consecutive
monthly increase. Developments in the major sectors of the economy were
marked by strong differences. While the agricultural sector contracted
2.0% over January 2004, services added 5.6% over the same month last
year. Services profited from stronger activity in communications, real
estate, financial services, domestic commercial activities and educational
services. The industrial sector expanded 3.1% over January 2004, a
notable slowdown from the 3.9% registered in December. In particular, the
manufacturing industry, which accounts for the bulk of industrial activity
and which holds the key to growth of the entire Mexican economy, reverted
from robust 4.2% annual growth in December to a more subdued 2.9%
expansion in January. Within industry, only mining, electricity, gas and
water output improved over December. Construction and the maquiladora
industry (in-bond manufacturing) deteriorated compared to December.
Leading indicators point upward and
consumer confidence remains high
Unemployment,
the only real sector indicator released for February, increased in the
second month of the year. Following on 3.8% registered in January, open
unemployment increased a notch to 3.9% in February. However,
unemployment has proven to be an unreliable indicator for the direction of
the entire economy. Consumer confidence and leading indicators provide a
more accurate picture of the economy. The leading and coincident
indicators for January, published on 5 April increased in unison for the
second consecutive month. The coincident indicator that tracks the
current developments in the economy was up 0.34% over the preceding month
in seasonally adjusted terms while the leading indicator that tries to
anticipate future developments in the economy increased 0.43% over the
preceding month. Consumer confidence, in contrast, dropped. In March,
the overall index of consumer confidence reached 105.7 points, down from
107.9 points in February. While consumer confidence declined over
February, the March reading represents the second-highest value registered
since Central Bank and INEGI have started elaborating data in January
2002 All five sub-categories that make up the overall consumer
confidence declined over February. Households’ plans to purchase durable
consumer were particularly depressed but still remain at a high overall
level, suggesting that a further acceleration in private consumption could
be sufficient to compensate for the anticipated slack in the external
sector.
Politics returning to centre stage as frontrunner
candidate for 2006 presidential elections faces legal charges
Attention is
once again beginning to focus on the political arena, as the presidential
elections slated for July 2006 are beginning to cast their shadow over
political developments. In the past decades, presidential elections were
often followed by severe economic crises. However, this pattern was
broken with the election of Vicente Fox Quesada in July 2000.
Nevertheless, concerns about a change in the course of economic policy
continued to worry investors. The rise in popularity of the likely
candidate of the left–wing Democratic Revolution Party (PRD, Partido de
la Revolución Democrática), Mexico City’s Mayor Andrés Manuel López
Obrador, has fuelled investor concerns. López Obrador has vowed to
overhaul Mexico's economic policy, which would entail a more leftist
approach to economic policy. According to the latest polls, his
popularity has risen from 27% in May 2004 to the current 37%, which makes
him the frontrunner for the upcoming elections, well ahead of potential
candidates from the incumbent president’s National Action Party (PAN,
Partido Acción Nacional) and the Party of Institutional Revolution
(PRI, Partido Revolucionario Institucional), which held the
presidency for seventy years until the election of Vicente Fox. Both, PAN
and PRI are moving to stop the advance of López Obrador to the country’s
top position by challenging the legality of decisions he has made during
his tenure as mayor of Mexico City. On 1 April, a four-member
congressional committee recommended with a 3-1 vote that López Obrador
should be removed from office and be stripped of his immunity in order to
stand trial for allegedly ignoring a court order to halt the construction
of an access road to a capital hospital. On 7 April, Congress backed the
committee’s impeachment decision with a 360 to 127 vote in favour of the
so-called desafuero. By Mexican law any politician on trial is
banned from registering for an election. Thus, López Obrador could be
banned from running for president in 2006, paving the way for a candidate
of the two more established parties. However, López Obrador remains
highly popular despite the current legal battle and his elimination as a
candidate for the presidential elections could prompt widespread street
protests in the capital and polarize the society.
Optimism about prospects for Mexican
economy prevails
Notwithstanding the political noise related to the desafuero of
López Obrador and the slight dent in economic developments in January
prospects, Consensus Forecast panellists are upbeat for this year’s
economic prospects. The panel estimates that the economy expanded 4.7% in
the first quarter slowing to 4.2% in the second quarter. In the second
half of the year, the economy will loose further steam, with the pace
dropping to 3.9%. For the full-year, Consensus Forecast panellists expect
the economy to expand 3.8%, up one tenth of a percentage point over last
month’s forecast. In addition, the panel hiked the growth prospects for
next year a notch from last month’s 3.7% to the current 3.8%.
Central Bank continues to tighten reins
despite declining inflation trend
Inflation is
declining rapidly. Headline inflation finished at 5.2% last year and thus
exceeded the upper limit of the Central Bank’s one percentage point
tolerance around its 3.0% target rate by a wide margin but subdued
consumer price developments in the first three months of the year reduced
the annual inflation rate to just 4.4% in March. Nevertheless,
inflationary expectations remain well above the Central Bank’s target and
consequently monetary authorities keep stepping up their efforts to
tighten the monetary reins. On 23 March, the Central Bank raised the
money market "short" (corto) to 79 million pesos per day
from 77 million pesos. An increase in the corto reduces
overnight lending to banks and indirectly drives up interest rates. This
was the third time this year that monetary authorities have acted to stem
rising inflationary expectations and follows on nine increases in the
corto last year. While the Central Bank acknowledged the declining
inflation trend observed in the beginning of the year, monetary
authorities said they wanted to make sure annual salary negotiations were
not affected by high inflationary expectations. As a result of the
Mexican Central Bank tightening, the benchmark 28-day Cetes rate
continued to rise and reached 9.57% on 31 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 0.1 percentage points to 8.8%. 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. |
