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Economic
activity recovers in July but remains weak
A more complete set of data for second quarter gross domestic product
(GDP) confirms the 2.8% expansion reported earlier. The second quarter
reading represented a slight acceleration over the 2.6% expansion recorded
in the first quarter. The acceleration over the previous period was
caused by a sharp rebound in investment, which expanded a strong 8.1%
year-on-year (Q1: +2.6% yoy). Total consumption, on the other hand,
decelerated from 3.6% annual growth in the first quarter to 2.9%. On the
external side of the economy, both exports and imports accelerated
slightly over the previous period. Exports increased 6.3%, up from 5.8%
annual growth in the first quarter, while import growth reached 9.1% (Q1:
+8.9% yoy). As a result, the net contribution of the external sector to
overall growth remained unchanged and continued to be negative (-1.1
percentage points). More recent data corroborate the acceleration in
economic activity but continue to point at the current weakness of the
economy. According to the global indicator for economic activity (IGAE,
Indicador Global de la Actividad Económica), the economy increased
2.8% in July over the same month last year. The reading constituted an
acceleration compared to the 0.9% growth recorded in June and also came in
ahead of market expectations, which had anticipated economic activity
would expand 2.2% annually. The acceleration over the previous month was
mainly caused by a strong rebound in agriculture, which expanded a robust
9.7% over the same month last year (June: +1.2% year-on-year). In
addition, the services sector accelerated from 2.2% in June to 4.2%. On a
negative note, the industrial sector remained sluggish and contracted for
the third consecutive month (-0.2% yoy). A month-on-month comparison
corroborates the acceleration suggested by the annual figures, as economic
activity increased 1.09% over the previous month in seasonally adjusted
terms, which was well up from the 0.17% expansion recorded in June.
Nevertheless, despite the stronger monthly result, the annual average
growth rate inched down from 3.3% in June to 3.2%.
Mexico to
suffer the effects of the financial crisis in 2009
With the
United States headed for a recession amid the worst financial crisis in
decades, growth prospects for Mexico are invariably deteriorating.
Although the financial system has been, so far, insulated from the global
credit crisis, the Mexican economy will suffer the effects of the U.S.
slowdown in terms of lower export growth as well as declining remittances
from Mexicans working in the United States. In fact the effects are
already being felt, as in August, remittances from workers abroad
contracted 12.2% over the same month last year, which is the largest
decline in more than a decade. Remittances from workers abroad are
equivalent to almost half of the country’s oil exports and over 125% of
total direct foreign investment. Moreover, as remittances continue to be
an important part of the total income for many Mexican families, this
severe reduction of capital inflows will probably prevent private
consumption from recovering next year. Exports, on the other hand,
continue to perform better than expected for the time being, as non-U.S.
destinations are picking up the slack from weaker demand from the United
States. However, with the industrialized economies decelerating notably
next year as the financial crisis spreads across the world, export growth
will moderate significantly in 2009. In addition, oil prices have
declined around 45.0% in the last three months, and will likely continue
to do so as demand moderates owing to the global economic slowdown
expected for 2009, thus further affecting the country’s external sector.
Oil accounts for over 15.0% of total Mexican exports and also constitutes
an important source of revenue for the government. Consensus Forecast
panellists expect exports to expand 9.6% this year; for 2009, export
growth is expected to moderate to 5.3%, which would constitute the slowest
pace in six years. Next to a diminishing contribution from the external
sector the economy is also likely to come under pressure from the domestic
side, as recent indicators point to a deteriorating outlook for the coming
months. In September, the tendency
indicator (IAT, Indicador Agregado de Tendencia)
dropped from 52.4 points in August to 49.8. In addition, the producer
confidence indicator (ICP, Indicador de Confianza del Productor)
fell from 45.8 points in August to 44.2. And finally, consumer confidence
declined from 89.6 points in August to 88.6 in September. Thus, consumer
sentiment remains well below the 100-point threshold that separates
optimistic from pessimistic territory, signalling that private consumption
is likely to remain sluggish for the time being. President Felipe
Calderón recently announced a 65.1 billion pesos (US$ 5.3 billion)
emergency infrastructure plan for 2009, in order to help the country
combat the effects of the world financial crisis. Calderón stated that
the plan is not intended to be a financial rescue program but rather
focused on igniting momentum fuelling the domestic side of the economy.
The president added that the country’s strong public finances as well as
the low external debt and the large amount of international reserves will
allow Mexico to face this financial crisis. Nevertheless, like most of
the countries around the world, in the past weeks the Mexican stock market
has also suffered the consequences of the current financial turmoil. In
the week up to 10 October, the IPC index lost 13.4% of its value,
taking the
accumulated loss so far this year to 32.6%.
Given the
negative international context, the government recently cut its growth
forecasts for this year and the next. Authorities now anticipate gross
domestic product (GDP) to expand 2.0% this year and 1.8% in 2009.
Consensus Forecast panellists continue to revise their forecast downwards
and anticipate the economy to grow 2.0% this year, which is 0.2 percentage
points down from last month’s forecast. For 2009, the panel has lowered
its growth forecast by almost a full percentage point, from the 2.9%
expected last month to the current 2.0%.
Inflation moderates for the first time in six months
In September,
consumer prices rose 0.68% over the previous month, which was up from the
0.58% price increase recorded in August. The reading came in virtually in
line with market expectations, which had anticipated prices adding 0.67%
over the previous month. Higher prices for food, beverages and tobacco as
well as for education and leisure were the main drivers behind the monthly
price rise. Despite the pronounced price increase in September, annual
headline inflation inched down for the first time in six months, from 5.6%
in August to 5.5%. The core inflation index, which excludes more volatile
categories such as oil, fresh fruits and vegetables, added 0.60% over the
previous month. As a result, annual core inflation stepped up a notch,
from 5.3% in August to 5.4%. Thus, both headline and core inflation
remain well above the Central Bank’s long-term inflation target of 3.0%
and even exceed the upper limit of the ±1.0% tolerance margin. On 19
September, the Central Bank left the benchmark interest rate unchanged at
8.25%, following on three consecutive hikes. Monetary authorities
signalled that the stronger than expected economic slowdown will help curb
price pressures and, as such, inflation should fall back into the Bank’s
forecast range. The Central Bank aims at lowering inflation to its 3.0%
target by 2010. Consensus Forecast panellists anticipate headline
inflation to remain unchanged an end the year at 5.5%, which is 0.2
percentage points above last month’s forecast. For 2009, the panel
expects inflation to decelerate to 3.9%.
Peso plummets
to historic lows forcing Central Bank to intervene
In September,
the exchange rate depreciated 6.0% in nominal terms over the previous
month to reach 10.95 pesos to the US$, which is the lowest
end-of-month level observed in over a year. The monthly depreciation is
the largest recorded in almost a decade. The Mexican peso tumbled
as, on 29 September, the U.S. House of Representatives rejected the
government’s US$ 700 billion bailout package for the financial sector,
increasing the prospects of a deeper and longer economic downturn in the
United States, which, in turn, dampens growth prospects in Mexico.
Moreover, in the first ten days of October, the peso plunged a staggering
16.5% in nominal terms over the end of September, reaching 13.12 pesos
to the US$. The dramatic fall prompted the Central Bank to sell US$ 8.9
billion (over one tenth of the country’s international reserves) in order
to defend the currency. By 10 October, the peso had depreciated nearly
25.0% since the beginning of August, when it reached a six-year high
against the US$, fuelled by the strong interest rate differential with the
United States. Consensus Forecast participants are still factoring in the
latest developments but expect the currency to rebound and appreciate
again in the coming months, with the exchange rate reaching 10.9 pesos
to the US$ by the end of the year. For 2009, panellists anticipate the
exchange rate to depreciate to 11.2 pesos to the US$ by year-end. |
