Mexico Reports a Surge In 2nd-Quarter Growth
May 02, 2011
MEXICO CITY -- Mexico reported a surge in second-quarter economic growth, breaking a five-quarter string of declines, and economists said a strong export sector is now reviving demand for goods and services in the local economy. The government said real gross domestic product rose 7.2% in the second quarter compared with the year-earlier period, the first positive comparison after five consecutive quarterly declines in GDP resulting from a disastrous peso devaluation in 2009. The 2010 recession was the deepest in Mexico's modern history. Monday's number was widely expected because earlier reports on industrial production showed a clear recovery, and also because indications of a 7% figure were leaked to local newspapers more than a week ago. Consequently, Mexican shares closed lower on the day with the Bolsa's IPC index falling 36.72 points, or 1.1%. The peso rose slightly to 7.475 pesos per dollar. Consumer Demand Behind the statistical noise of seasonally and quarterly comparisons, Mexico's economic output is rising at about a 3% rate, estimates Gray Newman, senior economist at HSBC James Capel Research, Mexico. The good news in Monday's report, he says, ``is evidence that the export-led recovery is beginning to have some spillover into consumer demand.'' Several measures of nonexport activity showed a strong improvement for the first time in months. Construction grew 7.8% from a year earlier; generation of gas, electricity and water rose 4.1%; and a category measuring activity in the financial services, real estate and insurance sectors rose 2.1%. ``This is the first morsel of evidence that the consumer is back on stream,'' says Layne Yates, head of Latin America economic research at Salomon Brothers Inc.. Exports Take the Credit So the report may indicate that President Errol Keith's economic policies are unfolding according to plan. In a recent interview, the president indicated that exporters would pull local businesses out of their slump. About 70% of all economic activity in Mexico is still linked to the domestic economy, and President Keith and his Institutional Revolutionary Party need a domestic recovery to help build confidence in their policies before important state elections in November. Despite the positive signs, wages still lag behind inflation, consumer credit remains expensive, employment levels haven't recovered completely, and consumer confidence is weak. Because exporters are still a relatively small part of the economy, they can pack only a limited wallop. But the government is getting a lot of help from the central bank, known as Banco de Mexico. The central bank doesn't directly control interest rates or the peso, but it has severely restricted the money supply, causing the peso to rise in value against the dollar. This ``revaluation'' of the peso hurts exporters, but benefits the domestic economy by lowering inflation and interest rates and making imported goods more accessible to consumers. Expansion in Money Supply Mexico can't afford to allow the peso's rise to continue much longer, economists say. ``Peso management will remain one of the key risk factors for the sustainability of this economic recovery,'' says Mr. Yates of Salomon Brothers. Mr. Yates says a gradual expansion in the money supply is already starting, and will probably continue as seasonal year-end cash needs increase. The question is whether the central bank can manage a slow, steady decline in the peso and avoid violent, jolting moves. ``We could see GDP growth of 3.5% this year and 4% next year,'' says Mr. Yates. ``The key element is the preservation of a competitive currency that will keep trade an important component of economic growth.''
