Implications: The industrial sector, especially manufacturing, is now at depressed levels, and recovery should start in tune with higher demand from the United States in the third quarter of 2009. Nonetheless, recovery will only be slow and from a very low base.

Outlook: For 2009, IHS Global Insight is revising its forecast downward, and GDP growth is now expected to fall into the negative, with a contraction ranging between 6.0% and 7.0%.

The country's industrial sector, which is heavily dependent on demand from the U.S. market, remained at depressed levels in May. When compared to May 2008 (year-on-year, y/y) industrial output fell 11.5%. Seasonally adjusted data show that industrial output declined 2.2% with respect to April 2009. Three out of the four components of the index posted positive growth in the yearly comparison. Manufacturing and construction plunged 16.3% and 9.5%, respectively, while utilities dropped 2.1%. The mining sector inched up 0.3%, as the non-oil sub-sector jumped 18.4%. While the worst of the crisis may have occurred in the first quarter of the year, so far, data available for the second quarter do not show much improvement, especially those for construction and manufacturing. Poor demand from the United States continues to keep exports of Mexican manufactures at very low levels, and despite efforts by the government, construction remains at depressed levels.

Signs of Hope

The purchasing managers’ index for manufacturing showed some signs of improvement in June, with the index for the month at 47.0. This is still below the threshold of 50 that would signal an expansion, but it is the highest number recorded this year and clearly shows—as a leading indicator—that the beginning of the recovery may be as soon as July 2009. Another June survey pointing to a recovery is the one for consumer confidence, although these numbers reflect to a large extent the sentiment of consumers after the threat of a pandemic (of A/H1N1, swine flu) receded.

Central Bank Cuts Rate Again in July

On 17 July, the Central Bank of Mexico (Banxico) cut the policy rate from 4.75% to 4.50%, the seventh cut in as many meetings in the new expansionary cycle that started in January 2009. This time, the magnitude of the cut was smaller than those implemented from March through June. Compared with December 2008, the reference rate has been reduced by 375 basis points. Rate cuts usually take from two to four quarters to have an effect on the economy (so no immediate fix is expected); however, the move is important for psychological factors such as consumer confidence and business sentiment, because it signals that Banxico will behave in the same way regarding other measures that might help prevent a credit freeze or that would inject liquidity into the system.

The decision by the central bank, according to its communiqué, balances two risks: recession and lower demand, which call for lower interest rates; and the risk of inflation, which supports higher interest rates. Despite much lower prices of commodities in international markets (compared to 2008), Mexico's consumer price index (CPI) has decreased very slowly; still, the bank is showing that—in its own view—in the risk balance, the recession more than offsets any concern about inflation. A variable that has delayed the slowdown in inflation is the exchange rate, which recently suffered from speculative attacks. The Mexican peso depreciated, drastically increasing the price of imported goods. In its communiqué, Banxico pointed out that the easing cycle—that is, rate cuts—may be close to an end, as interest rates are relatively low and inflation is still well above the targeted 3% (as of June annual inflation amounted to 5.74%).

On the balance of risks, the deterioration in economic activity dominates risks of inflation. Commodity prices remain low, and major industrialised economies are expected to have deflation; therefore, inflationary pressures in Mexico should decline. In addition, the government has frozen the price of gasoline (petrol) at a level that implies no subsidies, and has reduced the price of gas and electricity tariffs; these actions will help keep inflation in check. Now, the major concern for the monetary authority in Mexico is successfully avoiding a liquidity crisis and facilitating the flow of credit among financial institutions, especially from financial institutions to businesses and individuals (consumers). The monetary policy committee convenes every month, and the next meeting is scheduled for 21 August 2009.

Outlook and Implications

The Mexican industry, especially manufacturing, is now at depressed levels and recovery should start in tune with higher demand from the United States in the third quarter of 2009; but recovery will only be slow and from a very low base. All in all, the outlook for Mexico is gloomy. The U.S. recession, lower oil output, and restrictive monetary and credit conditions will continue to hurt the country in the upcoming quarters. For 2009, we are revising our forecast downward, and GDP growth is now expected to fall into the negative, with a contraction of between 6.0% and 7.0%.

Global Insight (Reino Unido)