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ECONOMIC BRIEFINGS
Information provided by the New York Office of
the Mexico Trade Commission/Bancomext.
ECONOMIC GROWTH
MEXICO showed a very strong growth in the last
quarter of 2004. On a year over year basis, the GDP
rose 4.9% in the forth quarter, the largest since
President Fox took office. As a result, the annual
GDP for that year reached 4.4% growth, boosted by
industrial production (exports and maquiladoras),
private consumption, construction and increasing
credit availability.
MEXICO’S EXPORTS JUMPED
Mexican exports were up last year by 14.5% for a
total of US$ 188 billion. Oil exports grew 27% and
non-oil exports almost 13%. 2004 was the first year
to show these strong numbers in exports since 2000.
MEXICO’S DEBT UPGRADED
At the beginning of the year Moody’s, and later on
Standard & Poor’s, upgraded the Mexican long-term
debt within the investment grade level thanks to
Mexico’s solid macroeconomics, flexible exchange
rate, lower total external rate and high levels of
reserves.
MEXICO REDUCED INCOME TAX
The government of Mexico is reducing income tax for
corporations from 33% in 2004 to 30% in 2005, 29% in
2006 and 28% starting in 2008.
FREE TRADE ZONES
MEXICO is opening several Strategic Free Trade Zones
under new regulations approved in 2004. This fiscal
regime is aimed to facilitate foreign trade and
manufacturing in a very competitive environment. Two
of these zones are starting operations in San Luis
Potosi Mexico, where there will be simplified
procedures and no taxes.
MACROECONOMIC PERSPECTIVES:
2005-2006
By Alfredo Coutiño
Director of the Center for Economic Forecasting of
Mexico
2004 seems to be the best year of the Fox
administration in terms of economic growth. Finally
the economy recovered from the recession-stagnation
process initiated in 2001. Last year the economy
advanced 4.4% after an almost zero average growth in
the past three years. Unfortunately, there are no
signs indicating that the recovery will be sustained
at the same pace along this year. The recovery of
the Mexican economy is mostly based on external
factors and less on internal engines. The weakness
of internal sources of growth makes the Mexican
economy to depend on the variability of the
international economy, particularly on the U.S.
economic performance.
Certainly, the recovery of Mexico in 2004 was mainly
due to the external demand: U.S. expansion and high
prices of oil. If external conditions in 2004 had
been less favorable, Mexico’s growth would have been
less than 4.4%. The Mexican economy does not have
strong domestic engines of growth, in fact, domestic
savings have decreased in the last four years,
inducing a fall in the ratio of total investment to
product from 24% in 2000 to 21% in 2004.
Our preliminary estimations indicate that in a less
favorable external scenario for 2004, in which the
U.S. would had grown 3.5% (instead of 4.4%) and the
price of oil would had been $20 per barrel (instead
of $31), the Mexican economy would have only grown a
little more than 3.0%. During 2004, however, given a
stronger expansion of the U.S. economy and a higher
price of oil, the Mexican economy grew more, 4.4%.
The additional growth in the U.S. (0.9 percentage
points) combined with an additional price of oil
($11 per barrel), induced and additional increase in
Mexican GDP of about 1.3 percentage points. The
additional growth in Mexico is explained by the U.S.
economy in 0.8 points, and by higher oil prices in
0.5 points. In this way, Mexico grew 4.4% instead of
3.1% thanks to a U.S. expansion of 4.4% and an oil
price of $31 for the Mexican crude.
Given the weakness of domestic sources of growth, a
moderation of the U.S. expansion, and lower prices
of oil, the Mexican economy growth in 2005 is
expected to be less. Undoubtedly, the recovery of
the Mexican economy will depend again on external
factors, since the domestic engines still remain
weak. The Mexican economy will be subject to the
variability of the international business cycle. The
GDP is expected to grow 3.5% and inflation will stay
around 3.5%-4.0% this year.
2006 is a political year characterized by
presidential elections. Public spending
traditionally increases in the last year of each
administration due to two factors: election expenses
and the political business cycle. On one hand, the
election process brings a huge amount of outlays
related with political campaigns. On the other hand,
the government expands its expenses in the last year
of the administration with the purpose of creating a
feeling of well-being and ultimately gaining some
voter preferences. In this sense, higher government
spending will produce a multiplier effect in the
economy, causing the GDP to increase in 4.5%.
Inflation, however, will be under control, thanks to
the discipline of monetary and fiscal policy along
the year. Job creation will be insufficient and
employment will continue rising.
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