Mexico Pulls Out of Its Recession

Mexico came roaring out of its worst recession in half a century, officials reported Monday, as they announced surprisingly vigorous economic growth of 7.2% in April through June.

Significantly, the figures showed the recovery spreading beyond Mexico’s relatively small export sector to industries that serve local businesses and consumers--evidence that the Mexican people are beginning to spend some money.

Monday’s announcement was the strongest sign yet that Mexico, the No. 3 trading partner of the United States, is turning around faster than expected. That is good news for California, a prime destination of out-of-work Mexicans, and for the U.S. government, which Mexico still owes $3.5 billion.

But while the upturn was widely seen as impressive, economists cautioned against euphoria. The increase in illegal immigration of Mexicans to California and the decline in exports of California products to Mexico, both attributed to the nation’s economic crisis, will not reverse themselves quickly.

Analysts noted that the 7.2% growth was compared with the second quarter of 1995--the depth of the crisis. The Mexican economy is still about 3% smaller than it was at this time in 1994, before the recession began.

And it will probably be many months before the improvement trickles down to most Mexicans, still suffering from depressed wages, high interest rates and a lack of jobs. Several people interviewed on Mexico City’s streets Monday said they felt no sign of an economic recovery, and some suggested the government was lying.

“Statistically speaking, maybe it’s true,” said Lea Granados, a 26-year-old computer specialist, when asked about the recovery. “But in the pockets of the people, you see another reality.”

Mexico plunged into crisis after a botched devaluation of its peso in December 1994. In the country’s worst downturn since the Great Depression, about 1 million people lost their jobs, the economy shrank 6.2% and Mexico was forced to rely on a $13.5-billion emergency U.S. loan to avert defaulting on its debts.

On Monday, economists in Mexico and on Wall Street were busily revising upward their forecasts of growth for the year. The government estimates the economy will expand at least 3%.

“This is about as good as it gets,” said Jim Nash, the Latin America economist at Nomura Research Institute-America, referring to the growth figure. “It indicates a strong recovery.”

But many analysts remained cautious about how solidly Mexico’s economy will perform in coming years. They noted that the economy is unlikely to soon produce the 5% annual growth that’s necessary just to keep pace with the rapid expansion of Mexico’s labor force.

Ciemex-WEFA, a U.S.-based economic forecasting firm, estimated employment will return to its pre-crisis level only a year from now, and the unemployment rate is expected to continue to climb. Therefore, many Mexicans will probably still seek their futures in California and other U.S. states.

Meanwhile, Mexico’s banking system remains weak, restricting new loans. And many consumers are still groaning under mortgage and credit-card loans that ballooned when interest rates exploded to 100% last year.

“The domestic fundamentals are simply not there to support super-strong domestic growth,” said Geoffrey Dennis, director of emerging markets research at the Wall Street firm Bear Stearns & Co.

Nonetheless, there is welcome evidence that Mexico is getting back on its feet. The figures showed, for example, that the industrial sector grew a stunning 13.9% in the second quarter compared with the same period a year earlier.

Much of that is attributed to exports. They have been buoyed by the devaluation of the peso, which made Mexican products bargains overseas, and the North American Free Trade Agreement. Such growth benefited primarily border areas and the manufacturing centers, notably Monterrey.

But the latest numbers also showed more domestic-oriented growth: a 7.9% rise in the commercial sector and a 7.8% increase in the depressed construction industry. That suggests that Mexicans are returning to stores and auto showrooms and that businesses are stocking up their warehouses, at least in comparison with the bleak year-earlier period.

“You have a big domestic turnaround going on,” Dennis said.

The upturn marked the latest piece of uplifting economic news for President Ernesto Zedillo, who has doggedly pursued an unpopular austerity program with strong U.S. support.

In recent months, interest rates have dropped, the once-erratic peso and stock market have steadied, and Mexico has been so successful in finding private international lenders that it recently repaid the bulk of the U.S. emergency “bailout” loan--three years early.

Zedillo, a Yale-trained economist who spent much of his career in the Central Bank, said Monday that he will continue his cautious policies.

“We must persevere on this course until we achieve a recovery that is a solid platform for advancing toward the economic growth with jobs that Mexico needs,” he said in a speech at the presidential palace.

Some analysts said the stronger-than-expected economic figures, as well as the stability of the peso, will probably draw foreign investors back to Mexico in coming months.

But they said that with congressional elections set for next year, Mexico has to be alert against an overvaluing of the peso--one of the reasons for the crash of ’94. Members of the ruling party may be tempted to push for a strong peso that would allow Mexicans to buy imports cheaply.

The Mexican stock exchange showed little reaction to Monday’s news, with the main index declining 36.72 points, or 1.09%. Expectations of strong second-quarter growth buoyed the market to a record high last week.

By U.S. standards, Mexico actually began emerging from recession in the final quarter of last year. The U.S. government generally measures the growth of national output--or gross domestic product--by comparing seasonally adjusted figures from consecutive quarters.

Mexico, in contrast, compares unadjusted figures with the same period a year earlier. By that measurement, Mexico now marks the formal end of its recession.

Helena Sundman of The Times’ Mexico City Bureau contributed to this report.

* U.S. WARNING: Mexican phone executives are told they could lose visas. D2

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Mexico’s Rebound

Mexico’s worst recession since the 1930s has officially ended, thanks to record exports. Auto sales are up, evidence that the Mexican people are buying. But unemployment continues to rise as the birth rate outstrips economic growth, pointing to continued political instability.

MANUFACTURING: Grew 13.9% in the second quarter, the highest rate in at least three years.

EXPORTS: Rose 60% over the last two years, boosted by the weak peso.

CONSTRUCTION: Grew 7.8% in the second quarter, the first increase since 1994.

CAR SALES: Jumped 32% in the first half of this year.

PESO: Stabilized after months of volatility, closing at 7.47 to the dollar Monday.

JOBS: Joblessness of 11.4% is expected to worsen through the decade because of the high birth rate.

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GDP

A second-quarter increase of 7.2%--pegged to the strength of manufacturing and exports--was the biggest quarterly rise in more than five years.

Sources: Bloomberg Business News, Mexican Assn. of the Automobile Industry, Ciemex-WEFA, wire reports

Researched by JENNIFER OLDHAM / Los Angeles Times