MexECON Blog

Quarterly Economic Overview - 2011 Q4

Mexico's economy continues to show surprising strength, in spite of global financial turbulence and slowing activity in some key developed countries.  In the third quarter of 2011, Mexican gross domestic product (GDP) grew 4.5% from the same period one year earlier, up from a second-quarter growth rate of 3.2% and in line with the robust increases consistently posted since early 2010.  For comparison, Mexico's average annual growth rate in the period from 1990 to 2010 was just 2.8%.  Mexican GDP has now risen on a year-over-year basis for seven straight quarters.  On a quarter-over-quarter basis, Mexican GDP has risen for nine straight quarters.

Mexico's current economic expansion got its spark primarily from rebounding exports, but the trade sector has now moderated.  Export growth in recent months has averaged just 16.7% year-over-year.  In contrast, export gains were in excess of 30% one year ago.  The moderation in exports has led to slower industrial production and weaker hiring, but unemployment is below its cycle peak, and consumer confidence has partially rebounded.  Since late 2010, personal consumption spending and investment have been the main source of Mexico's economic growth.

Mexico's stability indicators remain healthy, though they have deteriorated modestly.  Consumer inflation in recent months has been quite close to the central bank's target of 3.0%, but inflation at the producer level has accelerated to more than 8.0%, suggesting there are significant price pressures in the pipeline.  Nevertheless, Banco de México continues to keep its benchmark interest rate at a historically low 4.50%, just as it has since July 2009.  The government also continues to exercise reasonably good fiscal discipline.  Official data show Mexico's public-sector deficit stood at 2.3% of GDP in 2009 and 2.8% of GDP in 2010.  Figures from January through September suggest a deficit of similar proportion in 2011.  For comparison, the Organization for Economic Cooperation and Development (OECD) recently estimated the U.S. deficit was 10.6% of GDP in 2010.  Official figures show Mexico's public-sector net debt stood at 25.0% of GDP at the end of 2010, while the OECD says U.S. net debt stood at 67.3% of GDP.

Good economic growth, relatively high interest rates, and healthy public finances continue to attract international capital into Mexico.  Central bank data show foreign direct investment into Mexico (net foreign purchases of land, factories, offices, and other hard assets) rose to $12.3 billion in the four quarters ended June 2011, compared with a revised $5.5 billion in the previous four quarters.  Portfolio investment (net foreign purchases of Mexican stocks and bonds) rose to $35.5 billion, up from a revised $29.4 billion in the preceding period.  These capital flows have been more than enough to offset weaker international bank lending to Mexican entities.  Total capital inflows have not only been sufficient to cover Mexico's current account deficit, but they have led to a continuing rise in the country's foreign reserves.  Until mid-2011, they also put strong upward pressure on the peso.  Based on figures from the U.S. Federal Reserve, the peso's spot-market value at the end of May 2011 reached $0.08581 (11.65 per dollar), up 25.7% from its mid-recession low in March 2009.  As the world's financial markets faltered this summer, however, capital flows into Mexico appear to have weakened, and the peso has pulled back sharply.  Federal Reserve figures show that at the end of September 2011, the value of the peso had fallen back to $0.07655 (13.06 per dollar).

In the coming months and quarters, the Mexican economy will probably keep growing.  Even a slow expansion in the United States should be enough to keep Mexican exports rising, and the momentum in consumption and investment should keep domestic demand on the upswing.  Nevertheless, Mexican economic growth will likely slow down.  The International Monetary Fund currently forecasts Mexican GDP growth will fall from 5.4% in 2010 to 3.8% in 2011 and 3.6% in 2012.  The main near-term risk is that the United States and other key developed countries could slip back into recession.  In addition, rising drug violence could become so bad that it weighs more noticeably on domestic economic activity.  Mexico also faces future fiscal challenges if its oil production continues to decline.  Most important, the country is unlikely to keep growing well unless it implements key economic reforms, such as breaking up monopolies, deregulating the labor market, opening more industrial sectors to private investment, and otherwise increasing competition and investment.

Patrick Fearon, CFA
Vice President, Fund Management

GDP 2011 Q3 - Quarterly Report

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