RELATED ARTICLES "The Mexican Economy Since the Tequila Crisis," Southwest Economy, Nov./Dec. 2000 (Text or PDF) "Maquiladoras 2000: Still Growing," Business Frontier, Issue 3, 2000 (Text or PDF)

Global Economy
Mexico: An Update and Outlook

John Thompson presents an update of the Mexican economy and gives an outlook for 2001.

After experiencing strong growth throughout most of 2000, the Mexican economy finished the year soft and saw quarter-over-quarter real GDP decline by 0.3 percent in the fourth quarter (annualized rate). Most economic indicators, including manufacturing hours, industrial production, aggregate demand and the leading index, reinforced the widely held notion that Mexico's rapid pace of expansion had slowed and that economic growth would be softer in 2001.

GDP Growth
Year-over-year GDP growth for the fourth quarter was 5.1 percent, down from 7 percent in the third.[2] Quarter-over-quarter manufacturing hours fell an annualized 5.5 percent in the fourth quarter of last year; a drastic decline compared with the 4 percent rise in the fourth quarter of 1999. Quarter-over-quarter industrial production declined 5.4 percent over the same period after averaging 7.7 percent growth in the first three quarters of 2000 (annualized rate).

Aggregate Demand and Private Consumption
Despite rising 11.4 percent in the third quarter of 2000, aggregate demand (comprising private and government consumption, private and public investment and exports) increased a more modest 8 percent in the fourth quarter. Private consumption rose 7.6 percent in the fourth quarter after increasing 10.5 percent in the third.

Consumer Spending
Consumer spending was expected to be weak in 2001 because many Mexican consumers stocked up on goods in anticipation of typical post-election devaluation of the peso. But new estimates indicate that this falloff may not be as big as originally thought. On March 16, Guillermo Ortiz, the governor of Mexico's central bank, predicted aggregate demand will continue to slow but perhaps not as abruptly as previously expected.

The Peso
Mexico's trade deficit continued to increase in 2000 and now amounts to roughly 1.5 percent of GDP. This puts pressure on the peso and may eventually compound inflationary risk. The real purchasing power of the peso is returning to levels seen prior to the economic crisis of 1995 when the Mexican economy shrank 6.2 percent. The increase in purchasing power is likely to weaken the cost advantage of Mexican exporters, including the maquiladoras.

Maquiladoras
The slump in U.S. demand is putting pressure on the maquiladoras. This strain is particularly acute in the auto and high-tech areas. Press reports forecast maquiladora layoffs in the neighborhood of 1–2 percent as a result of the slowdown in the U.S. economy.

Business Investment
However, Mexico continued to attract a lot of business investment. The country is the world's fifth most attractive destination for foreign direct investment (FDI), according to A.T. Kearney's annual survey of the world's 1,000 largest companies. Nominal FDI rose 14 percent in 2000. Most of this came from the United States and was directed toward the manufacturing sector.

Outlook for 2001
The outlook for this year is for continued slowing in Mexico. The Dallas Fed's leading index for Mexico has declined since September, falling 0.9 percent in fourth quarter 2000. Mexican officials expect the national economy to expand about 4 percent in 2001, down from 6.9 percent realized in 2000 and lower than the previous estimate of 4.5 percent.

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