Political Considerations, High Oil Prices May Trump Optimistic Economic Forecasts

SourceMex Economic News & Analysis on Mexico, August 11, 2004 | Go to article overview

Political Considerations, High Oil Prices May Trump Optimistic Economic Forecasts


Government and private forecasters have released fairly optimistic projections for the Mexican economy for the rest of the year, but these predictions may unravel because of the sluggish pattern in the US economy that is tied to high oil prices and because of growing domestic political uncertainties.

The administration's optimistic view of the economy is reflected in the latest report from Banco de Mexico (central bank), which raised its projections for the country's annual GDP to a range between 3.75% and 4.25% growth this year. This compares with its previous forecast ranging between 3.5% and 4%. The recovery was already apparent in the first quarter of the year, when the administration reported a GDP growth of 3% for the three-month period (see SourceMex, 2004-05-05).

The central bank said its new projection was based on increased manufacturing activity. "There is still unused capacity in the economy that may imply more growth without inflation," said Manuel Ramos Francia, head of economic research at the bank.

Some jobs created in short term

Conflicting trends in the manufacturing sector suggest the recovery may still be weak. In late June, the government's statistics agency Instituto Nacional de Estadisticas, Geografia e Informatica (INEGI) reported that the number of workers employed in manufacturing as of April was down about 2.6% from the same month in 2003.

The maquiladora industry, however, recently reported a recovery in jobs after experiencing a slowdown in recent years. In a report published in late June, the Consejo Nacional de la Industria Maquiladora de Exportacion (CNIME) said the industry created 52,623 jobs in January-May 2004. This is in stark contrast to recent years, when the maquiladora sector reported sharp employment declines (see SourceMex, 2002-07-17 and 2003-10-22).

The rebound in jobs at maquiladora plants coincides with a slight improvement in the country's overall employment picture. A report published by the Secretaria de Trabajo y Prevision Social (STPS) said 12.47 million workers were registered to obtain social security benefits through the Instituto Mexicano del Seguro Social (IMSS) as of July, the highest level of the year. The STPS said the enrollment figures were still below the high of 12.77 million recorded in November 2000, when GDP growth reached 6.9% (see SourceMex, 2001-02-21).

Even with the positive job figures released by President Vicente Fox's government, skeptics say the administration on balance has failed to promote policies that produce jobs. Critics point to INEGI statistics, which indicate that more than 612,000 jobs have been lost since Fox took office in December 2000.

Furthermore, an analysis published by the Camara Nacional de la Industria de la Transformacion (CANACINTRA) criticized the Fox government for failing to support small and medium-sized businesses and forcing many workers into the informal economy. The report said that more than one-third of Mexico's economically active population (EAP) make a living as street vendors or through other activities in the informal economy.

Still, analysts point to other factors that they say are signs of a stable economy, including the strong performance of the stock market (Bolsa Mexicana de Valores, BMV) and the relative stability of the Mexican peso versus the US dollar.

Some private forecasters such as the bond-rating agency Moody's are also optimistic about the performance of the Mexican economy during the remainder of 2004. A Moody's report published in early August raised projections for Mexico's 2004 GDP growth to 3.9%.

In the report, Moody's said Mexico's economic recovery is "solidly on course," attributing its optimistic forecast to monetary stability, the ability of the Fox government to maintain strict fiscal discipline, and a favorable impact from the North American Free Trade Agreement (NAFTA). …

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