|
Economic
growth ends upward trend
In the first quarter, gross domestic product (GDP) increased 2.6% over
the same quarter last year. The reading came in below last month’s
Consensus Forecast of 2.9% and represents a notable slowdown over the 4.2%
expansion registered in the fourth quarter (previously reported: +3.8%
year-on-year). At the sector level, the quarterly deceleration reflected
slower growth in all three main economic sectors: agriculture, industry
and services. The industrial sector continues to be very weak, strongly
affected by the lacklustre performance in manufacturing, which increased
2.7% annually in the first quarter, well below the 4.7% growth observed in
the previous quarter. Construction growth also plummeted, from 3.0% in
the fourth quarter to virtually flat growth (Q1 2008: +0.1% yoy). The
service sector decelerated from 5.2% annual growth in the fourth quarter
to 4.0%. During the past eight quarters, the service sector has
constituted the main driver of the economy as it has been growing above
average, thus helping to offset the poor performance in the industrial
sector. Finally, agriculture output slowed over the previous quarter and
contracted 1.3% annually (Q4 2007: +1.4% yoy). A quarter-on-quarter
comparison corroborates the deceleration suggested by the annual figures.
According to seasonally adjusted data, the economy expanded 0.51% over the
previous quarter, the slowest pace observed in five quarters.
Economy
continues to resist U.S. slowdown but signs of weakness accumulate
Although the
latest figures show that the U.S. economy may be able to avoid an outright
recession, sluggish growth in the United States continues to affect the
Mexican economy significantly. In particular the export-oriented
manufacturing industry is suffering, with industrial production expanding
a meagre 0.9% annually in the first quarter. That said, so far, exports
have been much more resilient than previously anticipated, with exports
growing a robust 16.4% annually in the first quarter of the year, as
non-U.S. destinations are picking up the slack from weaker demand from the
United States, prompting non-U.S. exports to increase a strong 32.0% in
the same period. The current economic situation shows that the Mexican
economy is now better prepared to weather the effects of a slowdown in the
United States than in previous periods of weakness. Rising credit access
is promoting consumer spending, which in turn, is allowing domestic demand
to decouple from the movements of its northern neighbour to some extent.
Nevertheless, recent indicators from the domestic side of the economy show
dark clouds on the horizon. In May,
the tendency
indicator (IAT, Indicador Agregado de Tendencia) that gauges the
assessments of companies about production, plant utilisation, domestic
demand for their products, exports and personnel, fell from 53.9 points in
April to 52.2. Meanwhile, the producer confidence indicator (ICP,
Indicador de Confianza del Productor) which measures the preferences
for investment, the assessment of the current and future state of the
economy as well as the current and future state of the company also
dropped 1.4 points, from 50.0 points in April to 48.6. Finally, consumer
confidence fell sharply for the second consecutive month to 94.2 points,
down from 97.8 points in April, which is the lowest level since 2003.
Thus, after having crossed into pessimistic territory last month for the
first time in almost three years, the index falls further away from the
100-point threshold, as most consumers consider that the current economic
conditions are worse than a year ago. The finance ministry expects the
economy to grow 2.8% this year, while the Central Bank anticipates GDP
growth to be between 2.4% and 2.9%. Consensus Forecast panellists have
left their growth prospects for unchanged for the third consecutive month
and anticipate that the economy will expand 2.6% this year. For 2009, the
panel expects economic activity to step up to 3.3%.
Central Bank maintains rates but warns of rising risks
In April,
consumer prices increased 0.23% over the previous month, which was down
from the 0.72% price rise registered in March. Moreover, the reading came
in virtually in line with market expectations, which had anticipated
prices rising 0.26% over the previous month. Lower prices for housing as
well as for education and leisure helped mitigate a sharp increase in food
prices, which added 1.22% over the preceding month. Despite the subdued
April reading, annual headline inflation stepped up from 4.3% in March to
4.5%, which is the highest level in almost three years. The core
inflation index, which excludes more volatile categories such as oil,
fresh fruits and vegetables, added a more pronounced 0.41% over the
previous month. As a result, annual core inflation rose from 4.3% in
March to 4.6%. Thus, both headline and core inflation remain well above
the Central Bank’s long-term inflation target of 3.0%.
On 16 May,
monetary authorities decided to keep the benchmark interest rate unchanged
for the seventh consecutive month at 7.5%,
in a decision
expected by the market.
However, monetary authorities adopted a more hawkish tone in their
statement and warned that the considerable rise in price pressures was a
cause for concern.
Consensus
Forecast panellists anticipate headline inflation moderating to 4.2% by
the end of this year, which is 0.3 percentage points above last month’s
forecast. For 2009, the panel expects inflation to decelerate further to
3.4%.
Remittances
continue to decline
In the
first quarter, the current account balance recorded a deficit of US$ 1.5
billion. The figure represented a deterioration compared to the US$ 905
million deficit registered in the previous quarter (previously reported:
US$ 2.1 billion deficit) but constituted and improvement compared to the
US$ 2.2 billion deficit recorded in the first quarter of 2007. The
deterioration over the previous quarter was caused by a higher deficit in
the service and income balance as well as by a smaller transfer balance
surplus. The trade balance deficit, in contrast, improved notably from
US$ 2.9 billion in the fourth quarter to US$ 1.6 billion. Exports
accelerated slightly and grew 16.4% year-on-year (Q4 2007: +14.9% yoy).
Imports picked up the pace as well and expanded 14.4% annually (Q4 2007:
+12.2% yoy). Meanwhile, the transfer balance surplus dropped for the
fourth consecutive quarter and recorded a US$ 5.4 billion surplus, which
is the lowest transfer balance surplus observed since the second quarter
of 2005. The deterioration in the transfer balance was caused by a
decline in remittances from workers abroad, which reached US$ 5.4 billion
in the first quarter (Q4 2007: US$ 5.8 billion). As a result of the first
quarter reading, the moving annual current account deficit dropped from
US$ 5.5 billion in the fourth quarter to US$ 4.8 billion.
Consensus
Forecast participants see the current account balance deficit widening to
US$ 13.2 billion by the end of the year. For 2009, the panel sees the
current account deficit increasing to US$ 17.8 billion. |
