Forecasts for Economic Recovery This Year Mask Dire Statistics for January-March Quarter

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Private and government economists are beginning to project a recovery in the Mexican economy later this year, but the optimistic forecasts are masked by extremely dire statistics for the first quarter of this year.

Many of the optimistic forecasts are based on projections for a rebound in the US economy this year. The US experienced stronger-than-anticipated GDP growth of 5.8% in the first quarter of this year.

The US projections have led private and government economists to revise their forecasts for Mexican economic growth. Shortly after the release of the US first-quarter data, the Banco de Mexico (central bank) revised its projections to expect an annual GDP growth of 1.8% for Mexico, compared with its initial economic-growth forecast of 1.5%. The bank also released a separate survey of 30 private financial analysts in early to mid-April, which on average anticipated a GDP growth of about 1.63% this year.

Similarly, the private Centro de Investigacion y Docencia Economica (CIDE) modified its projections to anticipate GDP growth at 1.97%, compared with its previous estimate of 1.6%. US financial services company J.P. Morgan revised its forecast for Mexico's GDP growth to 1.8% from 1.4% previously.

"The fundamental factor in Mexico's recovery is inevitably the US economy," said Armando Baqueiro, the central bank's director of economic research. "If the US experiences robust growth, this will be reflected in Mexico's economy."

The rush to revise forecasts upward for the Mexican economy was also evident overseas. In its latest projections for Latin America, the European Commission (EC) raised its forecast for Mexican economic growth to 1.9% this year, compared with an earlier estimate of 1.3%.

But some economists say the Mexican government should adopt a more cautious stance because of recent projections that the US economy will not begin a solid recovery until the end of the second quarter of this year.

Roberto Galvan, director of Vanguardia Investment, said the first-quarter US GDP statistics were slightly misleading, since the US growth was fueled partly by increased defense spending and liquidation of inventories on the part of many US companies. US companies continued to experience weak sales and low profits during the first quarter of the year, which is not a sign of strength in the economy, said Galvan.

The Centro de Estudios Economicos del Sector Privado (CEESP) cautioned that any US recovery this year would be weak, compared with those of the 1990s, and would be followed by another economic retreat.

Beyond the impact of the US on the Mexican economy, the CEESP said growth would be limited by restrictions imposed by the Mexican Congress, such as a generally ineffective tax-reform bill approved at the beginning of this year and the decision to restrict investments in strategic areas of the economy like generation of electrical power.

Mexico's GDP contracts by 0.7% in first quarter

Economists also point out that the next three quarters will have to make up a lot of ground lost in the first quarter of the year, considered one of the worst in recent memory. The Banco de Mexico is scheduled to release its official data for the first quarter sometime in mid-May. But economists who responded to a survey conducted by the central bank anticipated, on average, a contraction of 0.7% in Mexico's GDP during the first quarter of the year relative to the last quarter of 2001.

When compared to the first quarter of last year, Mexico GDP probably contracted about 1.6%, said the central bank's Armando Baqueiro.

Some observers noted that domestic consumption remained fairly strong during the first quarter of the year despite the economic downturn. "Lower inflation and a decline in interest rates to historically low levels...have promoted consumer spending even though the economy is not growing," said the daily newspaper El Financiero. …