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Economy
contracts in August
In August, economic activity contracted 0.3% over the same month last
year, according to the overall indicator for economic activity (IGAE,
Indicador Global de la Actividad Económica). The reading contrasted
the 2.9% expansion seen in July and undershot market expectations of a
1.0% increase. In fact, the August reading marks the worst performance
since March this year, when the economy declined on seasonal factors. The
downturn over the previous month was broad-based, with all three main
economic sectors slowing over July. The agricultural sector experienced
the sharpest slowdown and contracted 9.6% annually (July: +8.2%
year-on-year). Industry also contracted but less markedly, declining 1.6%
annually, down from the 0.5% decrease registered in the previous month.
Finally, the service sector slowed to a meagre 1.2% expansion (July: +4.5%
yoy). A month-on-month comparison corroborates the slowdown suggested by
the annual figures, as economic activity declined 0.98% over July in
seasonally adjusted terms. As a result of the August reading, the annual
average growth rate dropped from 3.2% in July to 2.9%, which is the
slowest pace since December 2005.
Growth
prospects for 2009 continue to deteriorate
With the
United States economy already in a downturn that may last well into next
year, growth prospects for Mexico continue to deteriorate rapidly.
Although the financial system has been, so far, insulated from the global
credit crisis, the Mexican economy is set to suffer the effects of the
sharp slowdown in the U.S. – which receives around 80% of total Mexican
exports – 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. In the first three quarters of the year, remittances
from workers abroad contracted 3.7% over the same period last year.
Remittances constitute the second biggest source of dollar inflows and are
equivalent to almost half of the country’s oil exports. Moreover, as
remittances continue to be an important part of the total income for many
Mexican families, this reduction of capital inflows will probably prevent
private consumption from recovering next year. Meanwhile, although
exports have consistently performed better than expected throughout the
year, export growth is expected to come to a virtual standstill in 2009,
as most of the industrialized economies will enter into recession.
Consensus Forecast participants expect exports to expand a meagre 1.4% in
2009, which would constitute the slowest pace in seven years. Next to a
significant deterioration of the external sector, recent indicators from
the domestic side of the economy also point to a deteriorating outlook in
the coming months. In October,
the producer
confidence indicator (ICP, Indicador de Confianza del Productor)
fell from 44.0 points in September to 36.8. Moreover, consumer sentiment
continues to deteriorate. In October, the consumer confidence index (ICC,
Indicador de Confianza del Consumidor), fell from 88.6 points in
September to 82.0 points, which marks a new historic low since the index
was created in 2001. Thus, the index continues to drop further below the
100-point threshold that separates optimistic from pessimist territory,
signalling that private consumption is likely to remain sluggish for the
time being.
Against
this backdrop, the Finance Ministry recently stated that economic growth
probably slowed to 1.7% in the third quarter – which would constitute the
slowest pace in five years – as the global credit crisis weakened the
manufacturing and construction industries. Authorities stated that they
expect the economic slowdown to continue during the next six months but
that growth could start picking up in the second half of 2009. President
Calderón has assured that the country has enough reserves to weather the
financial crisis and that the emergency US$ 4.4 billion infrastructure
plan announced last month should help spur growth and employment. The
government anticipates GDP growth to reach 2.0% this year and 1.8% in
2009. The Central Bank is more pessimistic and sees the economy expanding
only between 0.5% and 1.5% next year.
Consensus
Forecast panellists share the authorities’ view and expects the economy to
grow 1.9% this year, which is 0.3 percentage points down from last month’s
forecast. For 2009, the panel has lowered its growth forecast by a full
percentage point, from the 2.0% expected last month to the current 1.0%.
Inflation rises to seven-year high
In October,
consumer prices increased 0.68% over the previous month, which was
unchanged compared to the monthly rise observed in September. Moreover,
the reading came in broadly in line with market expectations, which had
anticipated prices adding 0.62% over the previous month. Higher prices
for housing as well as for food were the main drivers behind the monthly
price rise. As a result of the pronounced price increase in October,
annual headline inflation rose from 5.5% in September to 5.8%, which is
the highest rate in seven years. The core inflation index, which excludes
more volatile categories such as oil, fresh fruits and vegetables, added a
more moderate 0.31% over the preceding month. As a result, annual core
inflation inched down from 5.4% in September to 5.3%. 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. Nevertheless, on 17 October, the Central Bank left the
benchmark interest rate unchanged at 8.25% in a move that was expected by
the market. Monetary authorities argued that although inflation may
accelerate again, upside risks to economic growth owing to the global
credit crunch justified the decision. Furthermore, Central Bank’s
governor Guillermo Ortiz recently hinted at possible rate cuts in the
coming months, once inflationary pressures start to ease. Consensus
Forecast panellists anticipate headline inflation to moderate to 5.7% by
the end of the year, which is 0.2 percentage points above last month’s
forecast. For 2009, the panel expects inflation to decelerate further to
4.0%.
Peso registers largest drop in over a decade
In October,
the exchange rate depreciated 13.6% in nominal terms over the previous
month to reach 12.67 pesos to the US$, which is the lowest
end-of-month level ever observed. Moreover, the monthly depreciation is
the largest recorded in over thirteen years. As a result, by the end of
October, the peso was trading 15.7% lower than in the same month last
year. The dramatic fall in October prompted the Central Bank to sell US$
8.9 billion (over one tenth of the country’s international reserves) in
order to buttress the currency. The Mexican peso continues to be
battered by the global flight towards more secure assets seen across the
world, owing to the global financial crisis. This general trend is
exacerbated by fears that a recession in the United States will push the
Mexican economy into negative territory. Consensus Forecast participants
are still factoring in the latest developments but expect the currency to
recover somewhat in the coming months, with the exchange rate reaching
11.8 pesos to the US$ by the end of the year. For 2009,
panellists anticipate the exchange rate to depreciate to 12.0 pesos
to the US$ by year-end. |
