Politics Could Undercut Mexico’s Gains

As President Vicente Fox prepares to leave office amid political uncertainty here, he is handing his successor one of the healthiest economies in the last six years.

Inflation is tame. Industrial production is sizzling. Tax coffers are bulging with oil revenue. Formal employment is rebounding. Mexico’s economy expanded by 4.7% in the second quarter, fueled by strong consumer spending at home and robust demand for its goods abroad.

“I don’t think anyone expected it to be this strong,” said Christian Stracke, emerging-markets analyst with New York-based CreditSights.

The big question: How long can the party last?

Economic-growth figures released Wednesday by the Treasury Ministry beat most analysts’ forecasts and continued a string of good news in 2006. In the first three months of the year, Mexico’s gross domestic product, the nation’s output of goods and services, grew 5.5% from the same period in 2005. From January to June, Mexico’s economy expanded 5.1% compared with the first half of 2005.

Political tensions, however, threaten to undercut recent economic gains. Six weeks after Mexico’s presidential election, no winner has been declared. The final vote tally showing conservative candidate Felipe Calderon winning by a 0.6% margin has been challenged in court by leftist runner-up Andres Manuel Lopez Obrador, who claims that the results were tainted by fraud. His followers, who are demanding a vote-by-vote recount of all 41 million ballots cast, have shut down a main thoroughfare in the capital to traffic and clashed with federal police.

The showdown has deeply divided the Mexican public and raised fears that the next Congress won’t be able to reach a consensus on energy, labor and tax changes that experts say Mexico needs for sustained economic growth.

Mexico’s GDP growth averaged less than 2% a year in the first five years of Fox’s administration. Analysts say the nation’s economy needs to expand at least 5% annually to create the 1 million jobs a year needed to provide employment for the growing population.

External forces are also a concern, namely an economic slowdown in the United States, the destination for more than 90% of Mexico’s exports.

“Mexico is very tied to the U.S. business cycle,” said Alfredo Coutino, senior economist at West Chester, Pa.-based Moody’s Economy.com. “When the U.S. declines, Mexico goes down like crazy.”

But for now, the Mexican economy is exhibiting a vibrancy it hasn’t seen since the technology boom of the late 1990s. The nation’s agricultural sector led the way in the second quarter with 7.6% growth. Services expanded by 5.1%, and the industrial sector grew 3.9%, led by construction activity, which surged 5.1% in the second quarter. Much of that is attributable to a government-led housing initiative that has seen more than 2 million Mexicans become homeowners since 2000.

Similar to that of the U.S., consumer spending in Mexico accounts for about two-thirds of the country’s economic activity, and shoppers have been on a tear. Low inflation has helped boost real wages, giving consumers more money to spend. In addition, remittances from Mexicans working mostly in the U.S. are up 20% this year, according to Coutino, who predicts that they will reach $24 billion this year. Mexican banks and retailers are also extending more consumer credit, helping to sustain the shopping spree.

Mexico’s industrial sector is benefiting from strong demand from the U.S. Industrial production was up 6.9% in June, and merchandise exports soared 16.2% in June compared with the same month in 2005.

High petroleum prices have accounted for some of that jump. But manufacturing exports have been strong as well, particularly autos and auto parts. Mexican factories for U.S.-based automakers have been cranking out models such as the Ford Fusion, which have helped boost exports of Mexican-made models by nearly 50% to just over 876,000 vehicles through the first seven months of the year.

All that economic activity has led to strong job creation. Mexican government figures show that the nation added nearly 631,000 formal-sector jobs in the first seven months of the year. That’s more than were created in the first five years of Fox’s administration.

But Coutino said that trend wasn’t likely to hold. He said many of those jobs were temporary posts related to Mexico’s federal elections.