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Economy gathers speed in second quarter
A more
complete data set for national accounts confirmed the 3.1% annual second
quarter growth reported last month. The reading represents an
acceleration compared to the 2.4% growth registered in the first quarter
but fell short of expectations prior to the release of the initial data.
Moreover, according to seasonally adjusted data, the economy actually
contracted. The National Statistical Institute (INEGI) reported a 0.42%
contraction in seasonally adjusted terms in the second quarter over the
preceding quarter, the first contraction in two years, following on 0.18%
quarterly growth in the first quarter.
Investment spurs growth in second quarter
but consumptions slows
A pick-up in
investment drove the improvement in the second quarter compared to the
preceding quarter, mitigated by slower growth in consumption and a lower
net contribution from the external sector. Total consumption growth
dropped almost a full percentage point from 4.8% in the first quarter to
3.9% in the second. The deterioration was mainly due to a slowdown in
private consumption, which decelerated from the very robust 5.4% growth in
the first quarter to 4.4% in the second. Government consumption also
deteriorated from flat growth in the first quarter to a 0.5% decline in
the second, despite increased government spending power in the wake of
higher oil revenues. Gross fixed investment grew at a resilient 8.5% pace
over the second quarter last year, which was well above the robust 6.5%
registered in the preceding quarter. Thus, investment growth continued
the strong recovery experienced since 2004. Quarter-on-quarter data
corroborate the acceleration observed in the annual figures. According to
seasonally adjusted data, gross fixed investment added 3.05% over the
preceding quarter, which is equivalent to an annual growth rate in the
double-digit range. Exports of goods and services picked up from 4.8%
growth in the first quarter to 6.3% in the second, bolstered mainly by oil
exports. Import growth also picked up since the export industry depends
largely on imported intermediate goods as inputs (Q2 05: +9.1%
year-on-year; Q1 05: +7.9% yoy).
Economy disappoints in July but upward
trend remains intact
In July,
economic activity increased 2.0% 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 well below
expectations, which had the economy growing at an annual 3.9% pace, but
more than doubled the paltry 0.9% expansion registered in June. A
month-on-month comparison points to a much more pronounced pick-up in
July. According to seasonally adjusted data, the economy added 1.82% over
the preceding month, following on a 1.34% monthly contraction in June.
However, the bout of strength does not necessarily point towards continued
acceleration in economic activity. In part, the healthy July reading was
due to a rebound in agriculture, where activity surged 11.8% over July
last year. This rebound, however, followed a very weak June reading, when
agriculture contracted 12.8% annually, as scarce rainfalls prompted
farmers to delay sowing. The agricultural sector frequently exhibits
erratic movements and the bounce-back in July effectively compensated for
the June nosedive. The more important sectors of services and industry,
in contrast, slowed over June. While services slowed from a 3.0%
expansion in June to a 2.8% pace in July, industrial output growth
deteriorated from the weak 0.5% expansion in June to a 1.1% contraction in
July. The slump in the industrial sector mainly reflects weakness in the
manufacturing industry, which in turn is the result of lower U.S. demand.
The recently emerging downward trend in the overall economy remains
intact. In July, the annual average growth rate inched downwards a notch
from 3.6% in June to 3.5% - the second consecutive decrease.
Unemployment increases notably but leading
indicators and consumer confidence augur well for continued recovery
While recent
indicators paint an ambiguous picture of the overall developments in the
economy, the balance is tipped on the upside. In August, unemployment
rose to 4.1% from 3.5% in July. The August figure was well above market
expectations, which had anticipated unemployment to increase only 0.2
percentage points.
Consumer
confidence and leading indicators, on the other hand, augur an improvement
of the economy.
The leading
and coincident indicators for July, published on 5 October, both improved
over the previous month. The coincident indicator that tracks the current
developments in the economy was unchanged over the preceding month in
seasonally adjusted terms, following on a 0.87% decline in June. The
leading indicator that tries to anticipate future developments in the
economy increased 0.74% over the preceding month. Moreover, consumer
confidence, which had dropped in August, recovered by 0.6 percentage
points in September to reach 101.3 points, as all but one of the five
sub-categories that comprise the overall index improved over the previous
month. Given the sub-potential development of the economy, however, it
comes as a surprise that the confidence category that measures the
perception about the current economic situation of the country compared to
last year experienced the strongest increase. Only the attitude towards
purchasing consumer durables dropped one tenth of a percentage point over
last month.
Another downward revision to the full-year
outlook
In the first
half of the year, the economy expanded 2.8% over the same period last
year. The government expects economic activity to accelerate in the
second half of the year, as job growth and bank lending should drive up
domestic consumption. Therefore, the government has maintained the
forecast for full-year growth at 3.5%. The Central Bank, in contrast, is
less optimistic about the growth prospects for the remainder of the year
and has lowered the previous 3.75% projection to 3.0%. Consensus Forecast
participants are also increasingly pessimistic and have reduced the
outlook for this year from 3.4% expected last month to the current 3.2%.
Moreover, Consensus Forecast panellists see the diminished growth momentum
from this year providing a less solid backdrop for next year and expect
GDP growth in 2006 to remain limited at 3.4%.
Inflation Drops to Record Low in September
In September,
consumer prices increased 0.40%. The actual rate was well below the 0.51%
increase expected in last month’s Consensus Forecast. Higher prices for
education and recreation experienced the strongest price rise in
September. However, higher health service prices and housing costs also
contributed notably to the September increase. As a result of the subdued
development in consumer prices observed in September, annual headline
inflation dropped from 4.0% in August to 3.5%, the lowest rate since
1972. Moreover, the majority of the September price increase was
concentrated in the price categories that experience more erratic shifts
and are not included in the core inflation index. Thus, the core
inflation index increased by only 0.18% over August. and annual core
inflation dropped by 0.1 percentage points over August to 3.2%. Thus,
inflation is now easily below the upper limit of the Central Bank’s one
percentage point tolerance around the 3.0% central target rate. On 23
September, the Central Bank confirmed its assessment that year-end
headline inflation will remain within the 1% tolerance margin around the
3% target rate. Consensus Forecast panellists expect inflation to rise to
3.7% by the end of the year.
Central Bank cuts interest rate for second
consecutive month
Banco de
México
has taken the more benign inflationary environment into account and has
begun to reverse a string of consecutive monetary policy tightening. On
26 August and 23 September, the Central Bank reduced the benchmark lending
rate. On both occasions the Central Bank made use of the new policy tool
that consists of announcing a desirable level of interest rates instead of
adjusting the traditional policy tool, the so-called corto or
“short”, which was left unchanged at 79 million pesos. The
corto, which officially remains a policy tool, indirectly influences
interest rates by lowering or increasing the amount the Central Bank lends
overnight to the banking system. In a statement from 23 September, the
Central Bank said that monetary conditions would be allowed to ease no
more than 25 basis points. The move effectively reduced the overnight
loan rate to 9.25% from 9.50%. Moreover, monetary authorities indicated
that they will continue to loosen monetary policy. In a testimony before
the Senate on 4 October, the Central Bank Governor announced that monetary
authorities would keep cutting the lending rate as inflation is in line
with year-end targets. The new system appears to be working effectively.
The benchmark 28-day Cetes rate dropped from 9.57% on 25 August to
8.99 on 6 October, the lowest rate since January this year. Consensus
Forecast panellists expect the benchmark interest rate to drop to 8.8% by
the end of the year, which is unchanged over last month’s forecast. |
