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Economy
expands at the slowest pace in five years
In the third quarter, gross domestic product (GDP) increased 1.6% over
the same period last year. The reading was below the 2.7% expansion
recorded in the second quarter (previously reported: +2.8% year-on-year)
but came in slightly ahead of last month’s Consensus Forecast, which had
anticipated the economy would expand an even weaker 1.3%. Nevertheless,
the reading marks the slowest pace in five years. At the sector level,
the deceleration over the previous quarter was broad-based, as all three
main economic sectors slowed over the preceding period. That said, a
sharp slowdown in the industrial sector was the main driver behind the
quarterly deceleration. Industrial output contracted 1.3% annually, which
contrasted the 1.3% expansion recorded in the second quarter. Industrial
activity was dragged down by negative growth in manufacturing (-0.2% yoy)
as well as in mining (-6.4% yoy). In addition, the services sector, which
accounts for almost two thirds of the total economy, decelerated from 3.3%
annual growth in the second quarter to 2.8% in the third. Finally, the
agricultural sector increased 4.9% over the same quarter last year (Q2:
+5.6% yoy). A quarter-on-quarter comparison, however, does not
corroborate the deceleration suggested by the annual figures. According
to seasonally adjusted data, the economy expanded 0.63% over the previous
quarter, which was up from the 0.21% expansion recorded in the second
quarter.
Congress
approves spending increase to mitigate downturn
The United
States has been in recession since December 2007, according to the
National Bureau of Economic Research (NBER), a research organisation that
is considered to be the semi-official arbiter of economic cycles.
Moreover, recent economic data suggest that the U.S. economy is
deteriorating notably and that the recession will extend well into 2009.
Against this backdrop, growth prospects for Mexico continue to deteriorate
quickly. Although the financial system has, so far, shown resilience to
the global credit crisis, and the Central Bank reports that bank lending
remains steady, the Mexican economy is set to suffer the effects of the
recession in the U.S. in terms of slowing exports and declining
remittances from Mexicans working in the United States. In fact, the
effects are already being felt, and although the external sector has been
performing better than expected this year, exports are by now feeling the
pinch. In October, exports contracted 3.5% annually, which constitutes
the worst monthly result in more than five years. Furthermore, Consensus
Forecast panellists anticipate exports will contract 3.9% in 2009, which
would mark the worst result since 2001, when Mexico last suffered a
recession. Meanwhile, remittances from workers abroad continue to
moderate. Remittances have become an increasingly important part of the
total income for many Mexican families during the last years and lower
transfers are likely to dent private consumption next year. That said,
the strong appreciation of the US$ against the peso is starting to
cause Mexican workers in the United States to send more money home, in
order to take advantage of the more favourable exchange rate, which could
help offset some of the effects of the sharp downturn in the U.S.
economy. On the domestic side of the economy, the important industrial
sector continues to be hit hard by the current crisis, and registered its
fifth consecutive monthly decline in September. Furthermore, Consensus
Forecast participants anticipate industrial production to contract for the
first time in five years in 2009.
Meanwhile, on
12 November, Mexico’s Congress approved the 2009 federal budget, which
anticipates the largest deficit in almost two decades and which will
include a 13.0% spending increase, directed at offsetting the effects of
the global economic slowdown.
The
government anticipates economic 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. In fact,
Central Bank
Governor Guillermo Ortiz recently stated that the economy will not be able
to avoid an “important slowdown”, as most developed countries are in
recession. Consensus Forecast panellists share the authorities’ view and
expect the economy to grow 1.8% this year, which is 0.1 percentage points
down from last month’s forecast. For 2009, the panel expects economic
growth to fall to 0.4%, which is 0.6 percentage points below last month’s
Consensus.
Central Bank maintains interest rates unchanged
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 28 November, the Central Bank left the
benchmark interest rate unchanged for the third consecutive month at 8.25%
in a move that was expected by the market. The Bank argued that the
global financial crisis is increasing the downward risks for Mexico’s
economy. Moreover, monetary authorities stated that they expect inflation
to fall within its forecast range in 2009. Consensus Forecast panellists
anticipate headline inflation to rise a notch to 5.9% 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 to 4.1%.
Current
account continues to deteriorate
In the
third quarter, the current account balance recorded a deficit of US$ 5.0
billion. The figure represented a deterioration compared to the US$ 1.0
billion deficit recorded in the same quarter of last year and also
exceeded the US$ 2.7 billion deficit observed in the second quarter
(previously reported: US$ 2.0 billion deficit). The deterioration of the
current account balance was primarily caused by a higher deficit in the
trade balance. The trade balance deficit soared from US$ 767 million in
the second quarter to US$ 6.1 billion in the third, as imports outpaced
exports. Exports increased 12.1% annually, down from the 17.5% pace seen
in the previous period, while imports accelerated from 14.7% annual growth
in the second quarter to 16.8%. In addition, the transfer balance surplus
fell from US$ 6.4 billion in the second quarter to US$ 6.0 billion, as
remittances from workers abroad continued to decline. Remittances dropped
6.5% over the same quarter last year, the fourth consecutive quarterly
decline, as the sharp downturn in the United States continues to affect
this increasingly important source of financing. Finally, on a positive
note, the income balance improved markedly, as the deficit narrowed from
US$ 6.4 billion in the second quarter to US$ 2.5 billion. As a result of
the third quarter reading, the moving annual current account deficit rose
from US$ 7.8 billion in the second quarter to US$ 11.8 billion. Consensus
Forecast participants see the current account balance widening further to
US$ 13.7 billion by the end of the year. For 2009, the panel anticipates
the current account deficit increasing further to US$ 24.3 billion. |
