|
Economy disappoints in February bringing
the upward trend to a halt
In February,
economic activity increased 3.4% 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
well below expectations, which had the economy growing at an annual 4.6%
pace. Furthermore, the February growth represented a slowdown compared to
January, when the economy expanded by 4.0% year-on-year and in fact,
constituted the slowest pace in half a year. A month-on-month comparison
supports the slowdown suggested by the annual data. According to
seasonally adjusted data, the economy expanded a paltry 0.14% over the
preceding month, following on a 0.21% expansion in January. As a result
of the moderate growth in February, the upward trend broke, with the
annual average growth rate declining slightly from 4.50% in January to
4.46% in February. The decline in the average annual growth rate is
admittedly very small, however, it ends a trend that has remained over the
past 15 months. Furthermore, even though it would be premature to declare
an end to the recovery the current 4.1% growth rate projected for March by
this month’s Consensus Forecast confirms the new downward trend, with the
annual average growth rate dropping further to 4.33%.
Agriculture accelerates but services grows
at slower pace in February
In February,
only agriculture improved over the preceding month, with both industry and
services growing at a slower rhythm. Agriculture grew at an annual rate
of 2.9%, following on a 2.0% contraction in January. According to the
National Statistical Institute (INEGI), the February reading mainly
reflects an increase in cultivated area. Services added 4.3% over the
same month last year, almost a full percentage point below the January
pace.
Recovery of manufacturing industry remains
moderate
The
industrial sector increased 2.0% in February over the same month last
year. This was well below the 2.9% expansion observed in January and
represents the fourth consecutive month of decelerating growth. However,
while the overall development of the industrial sector is worrying, the
deceleration is more related to non-manufacturing industrial activities.
The all-important manufacturing industry, which accounts for the bulk of
industrial activity and holds the key to growth of the entire economy, is
holding up relatively well. In February, the manufacturing industry added
2.8% over the same month last year, which was actually a notch faster than
January’s 2.6% expansion. Seasonally adjusted data corroborate the
expansion, with industrial manufacturing growing 0.63% over January.
Moreover, the annual average growth rate is still headed upward, adding
one tenth of a percentage point from 4.0% in January to 4.1% in February.
Given the manufacturing sector’s pivotal role in the economy, the current
pace of the expansion is still disappointing. The moderate pace of
expansion reflects equally sluggish development of the U.S. industrial
sector. In April, the Institute for Supply Management (ISM) Purchasing
Managers' Index (PMI) indicated that activity in the U.S.
manufacturing
sector continued to rise
for the 23rd
consecutive month - the longest period of growth in the last 16 years.
Nevertheless, the rate of growth slowed to the lowest level observed since
July 2003. Moreover, the trend indicates that an even slower growth pace
is emerging. Consensus Forecast panellists expect the entire Mexican
industry to grow by4.0% this year and 4.2% 2006, as the economy continues
to lose market share in the United States to competitors from China and
Southern Asia.
Leading indicators and consumer confidence
provide ambiguous signals
Consumer
confidence and leading indicators provide a mixed picture of the immediate
outlook for the economy. The leading and coincident indicators for
February, published on 4 May point in different directions. The
coincident indicator that tracks the current developments in the economy
was down 0.09% over the preceding month in seasonally adjusted terms. The
decline was due to unfavourable developments in retail sales and in
salaries paid in the so-called maquiladora industry (in-bond
manufacturing). In contrast, the leading indicator that tries to
anticipate future developments in the economy increased 0.25% over the
preceding month, reflecting the positive development of the oil price,
exchange rate and stock market. Consumer confidence, in contrast,
declined again. In April, the overall index of consumer confidence
reached 100.3 points, down from 105.7 points in March. The 5.5 percentage
point drop in the index constitutes the steepest decline in consumer
confidence in two years and represents the second consecutive monthly
erosion after March confidence also exhibited a lower rate than February.
However, the overall confidence level is still relatively high since
February had marked the highest value registered since the Central Bank
and INEGI started elaborating data in January 2002.
Government expects slower growth in 2004
but hopes domestic demand will buttress the economy
Sluggish
growth in the industrial sector is taking its toll on first quarter
growth. According the latest government estimates from 2 May, the economy
expanded about 4% in the first quarter over the same quarter last year,
following on 4.9% in the fourth quarter 2004. The Finance Ministry
identified sluggish growth of the U.S. manufacturing sector as the main
reason behind the slowdown. The government estimate takes into account
the effect of having five fewer working days this year in the first
quarter than in 2004. Thus, the headline first quarter growth number (to
be published on 17 May) should actually come in below the government
estimate. Without adjusting for working days, the government estimates 3%
year-on-year growth in the first quarter. The Consensus is slightly more
upbeat about first quarter growth and anticipates that GDP grew at
___3.6___% pace over the first quarter last year. The government expects
activity in the U.S. manufacturing industry to slow further. Therefore,
given the important links between the Mexican economy and the U.S.
industrial sector, officials expect the economy to slow slightly this
year. However, officials hope that rising consumer spending and domestic
investment will compensate for the decline in export growth and expect the
economy to expand around 4% this year. Consensus Forecast panellists
share the moderately optimistic government assessment and see the economy
accelerating to a __4.2%__ pace in the second quarter, trailing off only
slightly to __3.9%__ in the second half of the year. For the full year,
the Consensus expects the economy to expand by 3.8%. In spite of the
build up of political noise ahead of the presidential elections slated for
July 2006, Consensus Forecast participants believe that the economy will
maintain the pace, expanding 3.7% in 2006. 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 continue to worry investors.
Politics to centre stage as frontrunner
candidate for 2006 presidential elections faces legal charges
The
government’s decision to bring legal charges against the opposition
frontrunner in the presidential race, Mexico City mayor Andrés Manuel
López Obrador (AMLO), has quickly moved politics to the centre of
attention for international investors. On 7 April, Congress decided with
a 360 to 127 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. Since Mexican law bans any politician on trial from registering
for an election, the decision would have effectively precluded López
Obrador from running for president in 2006, paving the way for a candidate
of the two more established parties, 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. However, López Obrador, who is also the most popular politician in
Mexico, mobilised 250,000 Mexicans on 25 April for a silent march in
protest of the prosecution. The strong support suggested that the
intentions of the two established parties to bar López Obrador from
running for president backfired. In fact, since efforts to prosecute him
began, López Obrador's lead in opinion polls has widened even further.
According to a poll in newspaper El Universal from mid-April, 72%
of Mexicans believe the current case against López Obrador is politically
motivated. President Vicente Fox reacted quickly to the growing protests
and on 28 April by removing Attorney General Rafael Macedo de la Concha,
who was responsible for issuing the charges against López Obrador and
ordered the attorney general's office to review the case. On 4 May, the
new Attorney General Daniel Cabeza de Vaca decided to drop the case so
that López Obrador can take part in the election. Fox’s decision has
effectively ended the crisis that had scared financial markets. However,
the increased chances of a markedly leftist candidate gaining the
presidential elections in July 2006 are now beginning to draw the
attention of investors. |
