Mexico’s economy loses steam

Mexico’s economy slowed in the last three months of 2006, and that could have consequences in the United States: Tough times in Mexico typically fuel immigration north of the border.

Mexico’s gross domestic product expanded 4.3% in the October-to-December period from the final quarter of 2005, according to figures released Friday by the finance ministry. It was the third consecutive period of slower growth in the nation’s economic output and a sharp decline from the 5.5% expansion registered in the first quarter.

The deceleration was blamed largely on a sluggish factory sector and a slowdown in exports to Mexico’s principal customer, the United States.

Some analysts believe it portends a challenging year ahead for new President Felipe Calderon, who campaigned on promises of creating millions of jobs and vibrant economic growth for Mexico.

“When I took a look at some of the numbers I said, ‘Uh-oh,’ ” said Eugenio Aleman, a senior economist for Wells Fargo & Co. in Minnesota. “Things are not looking good.”

On the year, Mexico posted GDP growth of 4.8%, the strongest since 2000. High oil prices pumped record tax revenue into government coffers. The nation had a banner year in job creation.

But Aleman and other economists are cautious about the nation’s prospects this year. The economy of the United States, Mexico’s biggest trading partner, is weakening. Mexico’s inflation has been rising, its oil production is slipping, and the nation’s bellwether auto sector has hit a speed bump.

The United States has long served as an escape valve for struggling Mexicans, but there are signs that this funnel is tightening. Growth in the sums of money sent home by Mexican workers slowed to a trickle in November and December compared with the final months of 2005. It’s an indication that stiffer border enforcement might be making it harder for undocumented Mexicans to reach America.

That will increase pressure on Calderon to reach a migratory accord with the United States. Unemployment in Mexico has soared. Rising prices on basics including tortillas, milk and eggs have sparked street protests. Millions of families rely on the remittances sent home, which have become the nation’s second-largest source of foreign exchange behind oil revenue.

Much of the slowdown in economic growth is attributed to manufacturing. Mexico’s factory sector expanded 3.1% in the final quarter of the year. In the first three months of the year it grew a sizzling 7.1%, driven by rebounding auto production.

But the Big Three’s woes are being felt south of the border. The Mexican plants of Ford Motor Co., General Motors Corp. and DaimlerChrysler account for about 70% of the cars assembled here, most of which end up in American showrooms.

A U.S. sales slump trimmed Mexican production and exports by 5% in December. The trend accelerated in January as exports tumbled to 88,915 vehicles, a 20.7% drop from January 2006.

Mexico’s overall export growth slipped to 6% in November and 4% in December after an average increase of 19% over the first 10 months of the year. Industrial production grew an anemic 1.6% in December, much lower than forecasts.

Meanwhile, consumer prices have been rising. Mexico ended 2006 with an inflation rate of 4.05%, up from 3.3% in 2005, sparked largely by skyrocketing prices for tomatoes, tortillas and other basic foodstuffs. Further increases could force Mexico’s central bank to raise interest rates, a move that would help curb inflation but would be a further millstone on growth.

“They don’t want to tighten policy and increase the risk of a much sharper decline in economic activity,” said Marcela Meirelles, Latin America economist with Trust Company of the West in Los Angeles.

Mexico’s oil sector probably won’t be as much of a help to the economy in 2007 as it has in years past. Petroleum prices have declined steeply since last summer’s record highs, meaning less oil revenue for Mexico’s treasury. Production also has fallen sharply at Cantarell, its largest oil field, a major worry in a nation that last year relied on petrodollars to fund nearly 40% of public spending.

Remittances too are showing signs of weakness. Mexican workers last year sent home a record $23 billion to their families. But the pace of growth decelerated markedly over the course of the year.

In the first quarter of 2006, remittances grew 27.5% compared with the January-to-March period in 2005. In the final three months of last year, remittances were up just 5.5% over the same period the year before. November and December were virtually flat.

Slower growth could be a result of tighter U.S. border enforcement. That’s a sign of progress for border agents but a potential blow for Mexico, where remittances have become a pillar of the economy.

“That’s worrisome,” said Christian Stracke, emerging markets analyst with New York-based credit research firm CreditSights Inc. He said remittances play a major role in Mexico’s balance of payments. “It’s something we’re going to have to keep an eye on.”

Stracke said Mexico’s construction sector, which expanded 5.9% in the fourth quarter, should continue to be a bright spot in 2007.

He said credit should also help keep the Mexican economy moving. Banks and retailers last year extended record amounts of credit card, auto loan, mortgage and other retail credit, which has bolstered consumer spending.

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marla.dickerson@latimes.com