Mexico’s Economy Posts Disappointing Growth

Mexico’s economy grew far less than expected in the second quarter, heightening anxiety heading into the 2006 presidential elections about how to jump-start growth and employment in a nation desperately in need of both.

Hampered by an anemic factory sector and weakness in the farm belt, gross domestic product from April to June expanded 3.1% compared with the same period a year earlier, according to figures released Tuesday by Mexico’s Treasury Ministry. That was ahead of the first quarter’s 2.4% growth, but well below the government’s forecast of 4%.

Mexico’s stock market closed down nearly 2% on the news. Some analysts looking for stronger growth expressed concern that Mexico’s economy was struggling at a time when its oil industry was benefiting from high prices, interest rates were relatively low, remittances from abroad were at record levels and the economy of the United States -- Mexico’s largest trading partner -- was chugging along.

Mexico’s second-quarter GDP, the estimated total value of goods and services produced over the three-month period, declined 0.42% compared with the first three months of the year.

“Basically, everything that needs to be in place for Mexico to grow is in place, and still Mexico is not responding,” said Alberto Bernal, an economist with investment research firm IDEAglobal in New York. “It is very, very worrisome.”

Agricultural output declined 3.3% in the second quarter compared with the same year-earlier period, according to the government data. Growth in farm products tends to be volatile from quarter to quarter, and analysts said it probably would rebound in the second half of the year.

Their big concern is Mexico’s weak manufacturing sector, particularly its key automotive industry, which has yet to benefit from the recent uptick in U.S. sales. Mexico last year exported more cars and auto parts -- $30.5 billion worth -- than it did petroleum. Employment in assembly plants and auto parts factories accounts for about one out of every eight jobs in the manufacturing sector, according to an analysis by Morgan Stanley.

But Mexico’s automotive fortunes are closely tied to the performance of the Big Three automakers, whose products account for the lion’s share of Mexico’s vehicle exports. The American brands continue to struggle in the face of competition from Japan and Europe. That has taken a toll on Mexican vehicle production, which declined 18.5% from 2000 to 2004.

“A shift in U.S. consumer preferences has left Mexican production out of sync with the most important growth areas for vehicle demand in the U.S.,” said Morgan Stanley senior Latin American economist Gray Newman in a recent report.

Analysts say the good news is that U.S. automakers are investing big in Mexico, revamping their product lines with new models they hope will boost interest among American buyers. Ford Motor Co. is rolling out a line of new mid-sized cars at its plant in Hermosillo, while DaimlerChrysler last week unveiled a new full-sized pickup that’s being manufactured at its Saltillo factory.

Still, experts say Mexico’s disappointing second-quarter growth underscores larger concerns about the nation’s ability to compete with up-and-comers such as India and China. While Mexico’s exports to the U.S., the destination for about 90% of Mexico’s exports, were up 8.5% in the first half of the year, China’s exports to the U.S. surged 27% in the same period. China has surpassed Mexico as the second-largest supplier of goods to the U.S., trailing only Canada.

Mexico isn’t creating anywhere near the 1 million formal-sector jobs it needs to keep up with its growing population. Illegal immigration to the United States is estimated to be running at a record 450,000 people annually. Adjusted for inflation, Mexico’s real GDP growth has been flat for nearly two decades. The nation’s political parties are at odds over tax, energy and labor reforms that some say are needed to move the economy forward.

“It’s going to be a major issue for all the candidates” heading into the 2006 presidential elections, said Suhas Ketkar, Latin American economist at RBS Greenwich Capital Markets in Connecticut. “Growth and job creation are going to be big campaign topics.”