Mexico’s 1st-Quarter GDP Better Than Expected

In a major surprise, Mexico’s economy proved far stronger than expected in the first quarter, shrinking only 1% from the same period a year earlier, officials announced Friday.

President Ernesto Zedillo said the January-March gross domestic product, which showed much better than the predicted 3% drop, is a powerful sign that the country’s economy will surge out of recession this year. The government is predicting an annual growth rate of 3%.

Economists were busily revising their forecasts upward Friday. They said that thanks to booming exports, Mexico’s worst recession in six decades finally appears to be ending.

“What this is saying is that things are not as bad as a lot of people were thinking,” said Jonathan Heath, an independent Mexican economist.

The GDP figure is the latest of a batch of positive economic news that has brought relief to Zedillo’s government--and to President Clinton’s. In recent weeks, once-stratospheric interest rates have declined, the peso has steadied and inflation has risen less than anticipated.

Still, economists predict that the recovery will be slow. Businesses and consumers are burdened by debts that became heavier yet during the recession, when the annual inflation rate shot past 50%. The banking sector remains so weak that the government this week offered a $3-billion assistance plan to help borrowers pay their mortgages.

On Friday, the fragile state of the banking sector was again on display. The government took over two small financial groups, Grupo Financiero Capital and Grupo Financiero del Sureste, because they had insufficient capital and risk reserves.

It has taken over eight other financial institutions since late 1994.

Nonetheless, officials were all smiles Friday as they reveled in the news of the GDP figure, which offers the most solid sign yet that the economy is on the mend. In fact, Zedillo predicted that the economy would grow 5% in the second quarter.

“The present evolution of the economy proves that we are on the right path,” Zedillo told a convention of merchants. Despite criticism, Zedillo has steadily pursued a policy of fighting inflation and slashing government spending.

Mexico plunged into recession after a devaluation of the peso in December 1994. Last year, the economy shrunk a stunning 7%. Mexico was forced to rely on a $50-billion U.S.-organized international loan package to stay solvent.

But the devalued peso has made Mexican exports cheaper abroad, and its exports reached their highest monthly level ever in April, an impressive $7.9 billion.

The manufacturing sector, a major source of exports, grew 4.2% in the first quarter, according to the GDP figures. Among the other industries rebounding sharply were metals and textiles.

The domestic economy remained sluggish, however. Production in the service sector shrank 3.2%. As they struggle with debts and pay that have lagged behind inflation, consumers are keeping a tight hold on their wallets. Authorities say domestic demand will probably not recover for many months.

The unemployment picture remains discouraging too. The government estimates the economy must grow 5% a year to provide jobs for the 1 million youths entering that market each year.

U.S. Treasury officials say the Mexican economy hit bottom late last year and that it has been slowly recuperating since. But Mexico generally measures economic output on a year-to-year basis. Therefore, if official Mexican forecasts are borne out, the recession will end this quarter.