Just as in the US, the weakness of the economy is reflected by the historically low level of interest rates. Yields on the benchmark government paper 28-day cetes fell to a new all time low of 4.35% at the 22 July auction. The previous low was 4.38%, three weeks earlier.
Unlike the US, Mexico's rates are set through an auction system, but the reason for them is identical. Companies and individuals are hunkering down, sensing that things may still get worse before they start to get better.
Until recently, domestic demand in Mexico had been holding up. The latest figures show that even this part of the economy is turning down. In June, the retailers' association, Antad (which does not include the country's biggest retailer, Wal-Mart de México, which managed a 1% increase in sales), reported that sales were down 0.2% year-on-year. The official government statistical agency, Inegi, reported that retail sales were down by 1.5% in May. Alarmingly, wholesale sales were down by 5.5% in May.
Another alarming sign is the pick-up in unemployment. The official unemployment figure (covering people over 12 who are looking for work but have not managed even an hour of paid work in the week of the survey) is 3.17%. This is the highest rate yet of the current administration. President Vicente Fox took office in December 2000. A year ago the open unemployment rate was 2.39%.
The most telling figure is the drop in employment in the formal economy. In the first half of the year, 27,600 jobs in the formal economy were lost. What is beginning to worry policymakers and commentators is that employment has dropped month-on-month for three successive months.
Against this background it is not hard to see why consumer confidence took a knock in June, dipping by 0.4%.
Jam tomorrow. The steady deterioration in the economy in the second quarter means that the government's hope that the economy will recover strongly in the second half of the year is based on nothing more than wishful thinking.
The increasing sluggishness of the domestic economy, coupled with the continuing weakness of the export sector, poses major problems for the Fox administration.
The prospect of lower oil prices, (which fell 5% on the prospect of less resistance in Iraq following the deaths of two of Saddam Hussein's sons) is likely to concentrate government minds further.
Oil supplies between 30% and 35% of the government's revenues: higher-than-budgeted oil prices have allowed the government to avoid chopping public spending. Weaker oil prices could lead to spending cuts and lower economic growth.
Oops. The finance minister, Francisco Gil Díaz, admitted that his 3% growth target for this year would prove difficult to meet. Most independent analysts reckon that 2% growth is more likely, and the central bank is forecasting 1.8% growth. Gil, who was speaking before the most recent unemployment figures were published and the scale of the domestic slowdown had become apparent, said that the problem was the sluggish growth in the US.
The sluggish rate of growth has prompted another cabinet minister, Carlos Abascal, who heads the labour ministry, to admit that the country is unlikely to create the 300,000 jobs it had hoped to this year. He said that he was profoundly sorry that there were 890,000 people still looking for work. Since President Vicente Fox took office, the workforce has increase by 3%, to 40.3m people: the number of unemployed has risen from 612,000 to 890,000.
Despite the problems, the government argued that it is doing better than other countries in coping with the slowdown in the US. This is moot: Costa Rica, just to take one example, is actually growing quite lustily (around 5%) despite the fact that 50% of its exports go to the US. Over 85% of Mexico's exports go to the US.
VW. Volkswagen is to lay off 2,000 people at its plant in Puebla and cut production because of sluggish sales to the US. The move threatens the jobs of another 6,000 people in the car-parts industry in the state. Altogether, around 35,000 people work in the motor industry in the state.
VW said that it would cut production by 23% from the beginning of August. It said that it had been disappointed by export sales of Jettas and New Beetles. It will end production of the old Beetle, which has been at Puebla since 1978, this month. In the first five months of the year, VW's exports were down by 13% compared with last year, at 103,379 vehicles.
The move may trigger a wave of labour unrest. The workers at VW are militant and members of the independent Unión Nacional de Trabajadores (UNT), which is not afraid to call its members out on strike. The telephone workers and aircraft cabin crew are prominent members of the UNT.
VW did sugar the redundancy pill by saying that longer term it would use the Puebla site for a new model.
Banking: Just as the economy starts to wallow, the banks are starting to lend. For the first time since 1994, new lending by banks has increased. In the first half of the year lending was up by 9% in real terms. Deposits were up by 4%.
The banks are desperate to lend. Their risk-weighted capital now stands at 21% of assets, well above the 8% minimum. Non-performing loans are around 5% of loans, and loan loss reserves are covering about a third of this.
The biggest growth in lending is coming in the business category. This is probably due to a new law on collateral, passed in 2000. The new law strengthens the banks legal rights when a borrower defaults. Banks can now claim the collateral proffered by the borrower more easily. Restructuring dud loans also becomes easier.
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