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Fourth quarter growth below estimates
In the fourth
quarter, gross domestic product (GDP) expanded 2.7% over the same period
the year before. The reading fell short of market expectations, which had
anticipated the economy to grow 3.0% in the final quarter. Moreover, the
fourth quarter pace was 0.7 percentage points slower than the 3.4% annual
growth rate observed in the third quarter. Detailed information for
supply and demand has not yet been published, however preliminary data
suggest that both, exports and investment growth remained robust, implying
a moderation in consumption. On a sectoral basis, agriculture and
services accounted for the slowdown. The industrial sector, in contrast,
accelerated from a very sluggish performance in the third quarter.
According to seasonally adjusted data, the economy expanded less
vigorously than suggested by the annual data, as the National Statistical
Institute (INEGI) reported 0.59% growth over the preceding quarter,
following on 2.10% quarterly growth in the third quarter. For the full
year, the economy expanded 3.0%, well below the 4.1% expansion registered
in 2004.
Economic growth to remain stable
More recent
indicators provide an ambiguous picture of the Mexican economy. While
consumer confidence points downward, the leading and coincident indicators
for November, published on 16 February, both improved over the previous
month. The coincident indicator that tracks the current developments in
the economy was up 0.52 percentage points over the preceding month in
seasonally adjusted terms. The leading indicator that tries to anticipate
future developments in the economy increased 0.65 percentage points over
the preceding month, the sixth consecutive monthly increase, which
supports the view of a more positive development of the economy in the
months ahead. Consumer confidence, in contrast, declined. In February,
the consumer confidence index reached 108.1 points, which was 0.6
percentage points below the January reading. However, the decline was
relatively small and consumer confidence remains well above the 100 point
threshold, which indicates that consumers remain optimistic about
prospects. Moreover, households are increasingly optimistic about durable
consumer goods purchases, as the relevant sub-index increased for the
third consecutive month to 117.6 points, the highest level since January
2003. Consensus Forecast panellists are nevertheless cautiously
optimistic about the prospects for the first quarter and the full year.
The panel expects gross domestic product (GDP) to expand 3.4% in the first
quarter - a significant acceleration over the 2.7% pace registered in the
fourth quarter. The Consensus sees economic growth accelerating to 3.9%
in the second and dropping to 3.6% and 3.2% in the final two quarters of
this year. As a result, for the full year, the economy will expand 3.5%,
which is at the upper end of the Central Bank’s 3.0% to 3.5% projection
and in line with the government projection.
July presidential elections unlikely to
dent growth
Apparently,
neither the Central Bank nor the private sector expects the upcoming July
presidential elections to dent economic growth. During the past decades,
Mexico was notorious for stumbling into economic crisis in the wake of
presidential elections. However, Vicente Fox’s presidency has effectively
broken the spell. Currently, leftist candidate former Mexico City Mayor
Andrés Manuel López Obrador of the Party of the Democratic Revolution (PRD,
Partido de la Revolución Democrática) remains the frontrunner in
presidential opinion polls. Even though López Obrador slipped in February
surveys he continues to maintain a comfortable lead over his rivals with
38% support among voters versus 31% for former Energy Minister Felipe
Calderón of the National Action Party (PAN, Partido Acción Nacional)
and 29% for former Tabasco state Governor Roberto Madrazo of the
Institutional Revolutionary Party (PRI, Partido Revolucionario
Institucional).
Inflation moderates in February
In February,
consumer prices increased 0.15%, well below the 0.34% projection in last
month’s Consensus Forecast and also less than the 0.59% increase in
January. Health and personal care products experienced the strongest
price rise in February, mitigated by virtually unchanged housing prices.
As a result of the moderate price development in the second month of the
year, annual headline inflation dropped from 3.9% in January to 3.7% in
February. In January, inflation jumped to the highest rate since August
2005, after having reached a historic low of 2.9% in November last year.
The core inflation index, which excludes more volatile categories such as
oil and fresh fruits and vegetables, increased by 0.34% and as a result
the annual core inflation rate dropped a notch from 3.0% in January to
2.9% in February. Thus, while core inflation remains just below the
Central Bank’s 3.0% central target rate, headline inflation still exceeds
the target. Consensus Forecast panellists expect consumer prices to
increase 0.29% in March, which would reduce headline inflation to 3.6%.
By the end of the year, Consensus Forecast panellists expect inflation to
reach 3.6%, which is unchanged over last month’s forecast. The Central
Bank expects overall inflation between 3.0% and 3.5% in 2006, with core
inflation steady at around 3.0%.
Central Bank cuts interest rate for seventh
consecutive month
The positive
inflation developments and the benign financial environment have prompted
the Central Bank to continue loosening monetary policy. On 24 February,
the Central Bank reduced the benchmark lending rate for the seventh
consecutive month. In a statement, the Central Bank said that monetary
conditions would be allowed to ease no more than 25 basis points. The
move effectively reduced the overnight lending rate to 7.50% from 7.75%.
Banco de Mexico left the traditional policy tool, the so-called
corto or “short”, which indirectly influences interest rates,
unchanged at 79 million pesos. The Central Bank maintains the
corto as a policy tool but has not made any adjustments since
switching to direct interest rate targeting in August last year. The
market had anticipated the Central Bank to cut interest rates and the
benchmark 28-day Cetes rate dropped from 8.02% on 29 December to
7.42 on 2 March, the lowest level since September 2004. The Central Bank
indicated that the manoeuvring room for further interest rate cuts is
limited. Nevertheless, Consensus Forecast panellists expect the benchmark
interest rate to decline further, ending the year at 7.2%, which is down
one tenth of a percentage point over last month’s forecast.
Current account improves but remains in
deficit
In the fourth
quarter, the current account balance recorded a deficit of US$ 2.7
billion, equivalent to 1.3% of GDP. The deficit represented a
deterioration compared to the US$ 304 million deficit registered in the
preceding quarter but was significantly below the US$ 4.6 billion deficit
(2.5% of GDP) observed in the fourth quarter 2004. Furthermore, the
actual reading remained below last month’s Consensus Forecast figure of a
US$ 3.7 billion deficit. For the full year, the current account
deficit reached US$ 5.7 billion, much lower than the US$ 7.8 billion
deficit registered in 2004 and in fact the smallest deficit registered
since 1997. A lower trade deficit accounted for the improvement in
the current account balance compared to 2004, while a higher surplus in
the transfers balance partly compensated the higher deficit in the
services balance. The transfers surplus increased 20.6% from US$
17.0 billion in 2004 to US$ 20.5 billion last year. The increase
mainly reflected higher transfers from Mexicans living abroad. In
the last years, remittances from abroad have become an increasingly
important source of funding for Mexico. In 2005, remittances reached
the equivalent of 71% of oil exports or 2.6% of GDP. While Consensus
Forecast panellists have substantially lowered their current account
deficit projections for this year over the past months, they nevertheless
expect the trend towards lower deficits observed during the last five
years to reverse this year, as Consensus Forecast participants see the
current account balance deficit reaching US$ 11.7 billion. Next
year, the current account deficit will rise further to US$ 15.5 billion.
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