Research Dept. News
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Monthly Report, num 285 - November 2005
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International review - Mexico
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Mexico recovering but losing competitiveness
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Retail sales in Mexico holding up while maquiladoras lead in industrial production.
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The Mexican economy grew by 3.1% year-to-year in the second quarter of 2005 thus recovering part of the situation in 2004. This recovery was based on investment, replacement of inventories and a better situation in exports. Under the heading of investment, it is the government that is playing the biggest hand, which raises some doubts about sustainability.
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Growth without inflationary pressures.
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By sector, bank and financial services, construction and transportation are showing the most strength.
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Unemployment under control but unit labour costs growing and hurting competitiveness.
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On the demand side, retail sales in June grew by 3.3% year-to-year, a rate somewhat lower than the average for recent months. On the supply side, industrial production in August moved up 2.1% year-to-year which meant a recovery compared with the decreases seen in previous months. The positive side of this growth lies in the leadership of the manufacturing component. Always ahead of local industry, the industrial production of the maquiladoras (foreign companies manufacturing in Mexico and exporting to the United States) moved ahead by 5.7%.
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Consumer prices remain moderate.
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The general employment rate rose to 4.1% of the labour force in August but manufacturing productivity stopped losing ground although it is still early to speak of real recovery. The most troubling note comes with the sharp increase in unit labour costs which was up 12.0%. This figure causes concern because Mexico has been suffering from a lack of competitiveness for some time. The sharp increase in unit costs, added to the fact that the Mexican peso is among those Latin American currencies which have lost least value, means growing difficulties for the trade balance which already is in deficit.
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On the positive side, consumer prices in September rose by 3.5% year-to-year. The moderation that was maintained during the first half of 2005 is thus being continued. The core component, excluding food and energy, went in the same direction for that month holding at a rate of 3.2%.
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Foreign sector worsening.
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The Mexican foreign sector is the most negative in an economy that, on the other hand, is growing without showing inflationary pressures. The trade deficit for the 12 months up to August 2005 held at 9.5 billion dollars, but if we exclude oil exports it come to 38.4 billion dollars and it is the loss of competitiveness that counts. The Mexican deficit especially draws attention at a moment when the overall group of economies in the region are showing trade surpluses.
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