Domestic and international organisations are cutting their GDP forecasts for both 2011 and 2012. The latest to do this as the IMF, which in its World Economic Outlook cut its GDP growth forecast for Mexico to 3.8% for 2011 and 3.6% for 2012. It had been forecasting 4.7% growth for 2011.
The latest economic statistics support such downgrades. Industrial output was up 3.2% year-on-year in July, the official statistics agency, Inegi reported. This was less than independent economists had expected: they had pencilled in growth of 3.8%. Manufacturing and construction both did well in July, rising by 4.8% and 4.1% respectively. Mining did poorly, falling 3.2%, thanks to a 4.3% drop in non-oil activity and a 3% drop in oil production.
The big worry is what is happening in the US. Inegi produced some alarming figures for exports in August. Although the overall fall in export revenues appeared modest at 3.2% (month-on-month), the underlying data pointed to serious problems ahead. In August non-oil export revenues were down by 5% compared with July. Even more of a concern to Mexico-watchers was the 6% drop in exports of manufactured goods and the 16% fall in exports of automotive products.
The immediate conclusion is that consumer confidence in the US is still in the cellar, and households are not considering spending money on items such as new cars. Inevitably the lack of demand in the US, which buys two-thirds of the cars Mexico builds, will lead to more job losses in Mexico.
In August, Mexico’s exports came to US$31.5bn. Non-oil exports were worth US$26.7bn. Overall exports were up by 17%, year-on-year, thanks to a 41% increase in oil export revenues.
It is worth noting that Mexico’s own oil imports in August (mostly refined products and natural gas) were up by 40% at US$3.7bn giving an oil trade surplus for the month of just US$1.2bn. For the first eight months of 2011 the oil trade surplus was US$8.9bn. Mexico’s oil imports in the first eight months of 2011 were up by 44% while oil exports were up by 42%.
The biggest single category of Mexican exports is automotive products. In the first eight months these revenues came to US$51bn, out of total exports of US$230.6bn. For the first eight months they were up y 24% year-on-year.
So Mexico’s trade account is just in the black for the year at US$1.4bn. The deficit in August was US$806m, so the country will probably run a deficit for the year as whole. Despite the apparently robust figures, Mexico could quickly face a balance of payments crisis if the US car market weakened further and the oil price tanked. Oil export revenues in the first eight months were US$37bn.
The government is warning that it will revise its GDP growth forecast for 2011, down from its current level of 4.3%.
Most local economists expect the Mexican economy to suffer if the US economy goes into recession again. In the budget for 2012, the government is forecasting 3.5% growth, on the back of 2.1% GDP growth in the US. The government has also plumped for (relative) fiscal austerity, committing itself to reducing the fiscal deficit from 2.5% of GDP in 2011 to 2.2% in 2012.
It is not clear that congress, which has to approve the budget, will accept such austerity in an election year. The government’s hairshirtedness may please the international credit ratings agencies, but this will have no tangible benefit to Mexico. As the government is anyway promising to borrow less the price at which it borrows is marginal, verging on the irrelevant.
The key question for Mexico is what happens in the US. The Mexican finance ministry is significantly more bullish about the US economy than the IMF, which is forecasting just 1.8% GDP growth in 2012. If US growth turns out to be closer to the IMF forecast, growth in Mexico would probably be closer to 2% than 3.5%. We are bearish about the US, and so believe that GDP growth in Mexico will be significantly lower than both the IMF’s and the government’s forecasts.
The government’s problem is that but setting itself such an ambitious fiscal target it has no room to manoeuvre if things go awry. To be fair, current spending will rise 6.3% in real terms in 2012, thanks to an 18% increase in state pensions. The problem is that public investment is being cut by 6.5%.
Orthodox economists argue that such as change will depress the domestic economy. We’re not so sure. Higher pension payments are, probably, more likely to result in an increase in demand for local goods and services. Capital investment projects invariably have a high international component.
The government’s main efforts at driving-on the economy in the budget are rhetorical. Although it calls for investment in new infrastructure and tax breaks for new housing projects it is not putting much money behind these initiatives. Indeed it is reducing tax breaks overall, and as for tourism, which the government has talked a lot about boosting, the budget for the tourism ministry has been cut in real terms for 2012.
Telmex: On 31 August the anti-trust CFC confirmed its judgment that Telefónos de México and its subsidiary Telnor had a dominant and potentially market-abusing position in the telecoms market especially in the business of completing calls to fixed line subscribers. The CFC made it clear that it had not found evidence of market abuse, just that there was little competition for Telmex.
Fixed investment: Fixed investment in Mexico was up 8.6%, year-on-year, in the first six months of 2011 according to the Inegi.
US dependence: Currently 78% of Mexico’s manufactured exports o to the US and only 8% go to Latin America. This is an unfortunate position since, according to the IMF’s recent economic forecasts, the US will grow by 1.8% in 2012 while Latin America will grow by 4%.
Unemployment: In August the unemployment rate hit 5.8%. In May the rate had been 5.5%. The August rate was the highest rate for 12 months. As 8.3% of those in work say that they do not have enough to do the true unemployment is getting on for 14%. Mexico’s population of working age is just under 40m. Around 7m people have joined the potential workforce in the past 10 years, but only 2.3m of them have found jobs in the formal economy (i.e. paying social security).
The peso: In August and September the Mexican peso fell by 22% against the US dollar, from M$11.6 to M$14.1. This more or less in line with the Brazilian Real and a bit more than then Russian Rouble (13%). Even the almighty Swiss Franc as fallen by 8% against the dollar in this period.
