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Economy in line with expectations
In September,
economic activity increased 3.9% 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 almost in line
with expectations of a 4.0% expansion and half a percentage point below
the 4.5% August reading. A month-on-month comparison, however, indicates
a stronger deceleration than suggested by the annual data. According to
seasonally adjusted data, the economy actually grew by 0.38% over the
preceding month, just half the 0.77% expansion observed in August. The
soft spot in September confirmed the downward trend that has been in place
since the beginning of the year. In September, the annual average growth
rate dropped another notch from 3.5% in August to 3.4%, the eighth
consecutive month without an increase.
Upward revisions to July and August data
lift third quarter growth above estimates
In the third
quarter, gross domestic product (GDP) expanded 3.3%, which was 0.2
percentage points short of expectations. The third quarter pace was a
notch faster than the 3.1% annual growth rate observed in the second
quarter of the year. However, according to seasonally adjusted data, the
economy expanded at a much more vigorous rate than suggested by the annual
data, as the National Statistical Institute (INEGI) reported 2.15% growth
over the preceding quarter, following on a 0.32% quarterly contraction in
the second quarter. Based on the seasonally adjusted data, the third
quarter reading represents the strongest quarter in more than five years.
Agriculture and services buttress growth
The slight
acceleration over the second quarter was due to stronger growth in
agriculture and services. Activity in the important industrial sector, in
contrast, decelerated compared to the second quarter. In the third
quarter, agriculture expanded 10.6%, reversing a 3.3% contraction in the
second quarter. In part, the acceleration in agriculture reflects a
rebound from the weak second quarter reading, which was due to postponed
activities owing to adverse climatic conditions. However, even so, the
sector experienced the fastest growth in ten years. Services also came in
at a robust 4.3% pace, slightly ahead of the 4.1% expansion registered in
the second quarter. Transport, storage and communications constituted the
fastest growing service sub-sector, expanding 6.6% over the same period
last year. According to INEGI, the sector profited from strong
traditional and cellular phone services. While the third quarter reading
in transport, storage and communications fell short of the even stronger
7.1% expansion in the second quarter, the sector has constituted a key
pillar of the economy, as it has grown above the 5%-threshold since the
third quarter 2003. Financial services also contributed to the strong
third quarter growth in services. In the third quarter, financial
services (incl. real estate) added 6.6% over the same quarter last year,
well ahead of the 65.5% expansion in the second quarter and the fastest
clip in more than a decade.
Manufacturing industry remains weak amid
strong competition from Asia
The
industrial sector, in contrast, continued to ail along. In the third
quarter, industry expanded a meagre 0.6%, only a fraction of the 2.9%
expansion registered in the second quarter. The main reason for the
dismal performance of the industrial sector was the all-important
manufacturing industry. Manufacturing accounts for the bulk of output in
the entire sector, which also includes mining, construction as well as
electricity, gas and water. Growth in the manufacturing industry was
barely positive, inching up a paltry 0.2% over the third quarter 2004.
According to INEGI, only 51% of the branches that make up the
manufacturing industry increased over the third quarter last year. The
weak manufacturing industry reflects slower demand from the United States,
where Mexican manufacturers continue to lose market share to the more
competitive Asian manufacturing hubs, in particular China.
Developments in key
indicators unclear about prospects of continued recovery
The first
indicators that are providing preliminary information for the final
quarter of the year are ambiguous. In October, unemployment dropped to
3.6% from 3.7% in September. That said, the headline unemployment figure
is a somewhat unreliable gauge of the current economic developments, as a
host of supplementary employment indicators elaborated by INEGI based on
different data sets point in different directions. Nevertheless, positive
unemployment data are supported by the leading and coincident indicators
for September, published on 6 December, which both improved over the
previous month. The coincident indicator that tracks the current
developments in the economy was up 0.43 percentage points over the
preceding month in seasonally adjusted terms. The reading represents the
third consecutive monthly increase and thus supports the more resilient
picture implied by the strong third quarter seasonally adjusted data for
economic activity. The leading indicator that tries to anticipate future
developments in the economy increased 1.07% over the preceding month, the
sixth consecutive monthly increase, which supports the view of a recovery
in the final quarter of the year. On the other hand, consumer confidence,
which had increased in September and October, declined again. In
November, the consumer confidence index reached 102.7 points, which was
0.6 percentage points below the October reading. Only two of the five
sub-indices of the overall consumer confidence index declined. However,
households’ plans to purchase durable consumer goods plummeted more than
6% over the preceding month, which does not bode well for the holiday
shopping season and could provide for a sudden and unexpected dent in
private consumption in the final quarter of the year. Consensus Forecast
participants have ended a series of downward revisions to this year’s
economic growth forecast and have maintained last month’s 3.1% projection
for 2005. The 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 3.5%.
Inflation drops to historic low in November
In November,
consumer prices increased 0.72%, just in line with the 0.71% projection in
last month’s Consensus Forecast. In October, consumer prices had
increased a much more subdued 0.25%. Housing experienced the strongest
price rise in November, mitigated by lower food, beverages and tobacco
prices. Since prices in Mexico typically rise towards the end of the
year, annual headline inflation fell in spite of the November price
spike. Annual headline inflation dropped from 3.1% in October to 2.9% in
November, the lowest rate since the Central Bank started reporting
inflation in 1969. The core inflation index, which excludes more volatile
categories such as oil and fresh fruits and vegetables, increased by 0.23%
and annual core inflation remained unchanged at 3.1%. Thus, headline
inflation is now a notch below the Central Bank’s 3.0% central target
rate. However, a relatively small price movement in the final month of
the year could send headline inflation back well over the target rate. If
consumer prices were to increase at the same 0.72% rate as in November,
annual headline inflation would finish the year at 3.4%. Consensus
Forecast panellists expect an even higher price increase in December and
have year-end inflation at 3.5%. For next year, Consensus Forecast
panellists expect inflation to pick up further, ending 2006 at 3.7%.
Central Bank cuts interest rate for fourth
consecutive month
Weaker
domestic demand and the more benign inflationary environment have prompted
Banco de México to continue to loosen its policy. On 9 December,
the Central Bank reduced the benchmark lending rate for the fifth
consecutive month. In a statement, the Central Bank said that monetary
conditions would be allowed to ease no more than 50 basis points. The
move effectively reduced the overnight lending rate to 8.25% from 8.75%,
the first time the Central Bank reduced the rate by as much as half a
percentage point since implementing a target interest rate in August. In
August, the Central Bank announced a 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. The new system appears to be working effectively. The
benchmark 28-day Cetes rate dropped from 8.82% on 27 October to
8.42 on 8 December, the lowest rate since December last year. Consensus
Forecast panellists expect the benchmark interest rate to drop to 8.1% by
the end of 2006, which is down one tenth of a percentage point over last
month’s forecast.
Exchange rate resumes appreciation
In November,
the Mexican peso ended a three-month string of moderate
depreciations and appreciated by 2.2% in nominal terms versus the US$
compared to the end of October. At 10.56 pesos to the US$ on 30
November, the peso was 6.4% stronger than at the end of November
last year. Higher returns on Mexican assets accounted for the November
appreciation. However, the recent interest rate cuts implemented by
Banco de Mexico in the past months are rendering investments in Mexico
less attractive and should thus soon end the appreciation observed this
year. In fact, Consensus Forecast panellists anticipate the Mexican
currency to depreciate by 5.1% next year to finish 2006 at 11.58 pesos
to the US$. A depreciation would come most welcome for exporters that are
continuously loosing market share to Asian competitors and now have to
cope with a stronger currency. |
