A year ago, many described Mexico as staring into the abyss: A soft U.S. economy, a currency that was far too strong and China poised to take away its export business.
Yet the Mexican economy fared better than many expected in 2003, with GDP in the fourth quarter two per cent higher than a year earlier. Current forecasts are for a pickup to 3.5 to four per cent in 2004.
Obviously, Mexico is doing something right. The fiscal deficit is very low at about 0.5 per cent of GDP. Inflation is just under four per cent and likely to ease further. Short-term interest rates are at an all-time low of 5.6 per cent, and bond yield spreads against U.S. bonds are less than two per cent, nearly 1.5 percentage points lower than a year ago.
Stock prices are up more than 70 per cent (in U.S. dollar terms) in the past year, and 15 per cent so far in 2004. There is also some relief from an overvalued currency, as the peso has eased by 10 per cent from last year’s peaks against the U.S. dollar, and by 20 per cent against the euro.
Exports were lacklustre during the spring and summer of 2003, but recovering global demand began to be felt in the fourth quarter of the year, pushing export growth to five per cent in November over year-ago levels, and then to 11 per cent in December.
Much of this pick-up is being driven by U.S. demand, as about 89 per cent of Mexico’s exports are destined there, but exports to Europe and South America are also rising at a double-digit pace.
Sectorally, export growth is coming from electrical and electronic equipment (27 per cent of Mexico’s exports) at 13 per cent; autos and other transportation equipment (17 per cent of exports) at 11 per cent; and oil (10 per cent of the total) at 16 per cent.
Fortunately for Mexico, export weakness did not produce a recession in 2003, because domestic demand filled the gap. This is a departure from the past, and can be attributed partly to an energized financial system.
Historically, Mexico’s household savings have been immobilized in risk-averse banks, but the entry of foreign players has catalysed increased flexibility in consumer borrowing.
Consequently, household and mortgage credit grew by 12 per cent in the past year, as consumers were able to finance purchases more readily. At the same time, the 1997 privatization of the pension system is now creating additional capacity to finance new investment by domestic companies.
The result of this extra domestic spending has been the creation of over 700,000 jobs. Unemployment still rose slightly, but it could have been much worse.
As for the future, the fly in the ointment is still politics.
The economy needs major reforms and serious investments in public infrastructure if it is to realize its growth potential. President Vincente Fox’s lofty reform plans have been slowed by an uncompromising opposition, particularly since his party’s minority status was further weakened in the July 2003 mid-term elections.
The bottom line?
The global outlook for 2004 is very promising and Mexico will go along for the ride.
But on top of that, the mobilization of domestic purchasing power is providing additional momentum – momentum that just might help facilitate the government’s reform agenda.
(Stephen Poloz is vice-president and chief economist for Export Development Canada. He can be reached at spoloz@edc.ca)
