| | |  Business News | July 2009 
Mexico GDP to Shrink 6.5%-7.5% This Year, Bank Says
 Jens Erik Gould & Hugh Collins
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July 30, 2009
Mexico’s central bank said the economy will contract at almost double the pace it previously forecast and said measures to strengthen public finances will help speed up a recovery.
The economy will shrink 6.5 percent to 7.5 percent this year, the bank said in a report today, compared with an April forecast for a maximum 4.8 percent decline. The economy shrank 10.5 percent to 11 percent in the second quarter amid the swine flu outbreak and shutdowns at auto plants, Manuel Ramos Francia, the bank’s chief economist, said at a news conference.
The bank urged the country to adopt measures to boost public finances, saying in its report that delaying such moves would “increase the vulnerability of the economy.” Mexico is seeking such changes after Standard & Poor’s cut its outlook on the country’s foreign debt to negative from stable in May.
“Our country’s capacity to get back on the path of sustainable growth will depend on the progress of structural reforms that encourage a more flexible and competitive economy,” the bank said.
Policy makers kept their consumer price forecasts unchanged. They expect an annual inflation rate of no more than 5.25 percent in the third quarter, slowing to as low as 4 percent by the end of the year.
Inflation
Inflation has slowed only “moderately” even as the economy plummets, the bank said. An inflation rate above 5 percent and investor concern that public finances will suffer from falling oil output mean policy makers can’t cut the benchmark interest rate further to stimulate growth, said Rafael de la Fuente, chief Latin America economist at BNP Paribas SA in New York.
“They’re stuck where they are,” de la Fuente said in a telephone interview.
The bank lowered the key lending rate a quarter point this month to 4.5 percent. It will keep borrowing costs unchanged through the end of this year, according to the median estimate of economists surveyed by Citigroup Inc.’s Banamex unit.
Annual inflation slowed to 5.74 percent in June, the lowest in nine months.
The economy is shrinking because of “Mexico’s heavy dependence on the U.S. economic cycle,” and because of “a deterioration in investor confidence due to a narrowing of maneuvering room in public finances,” the bank’s report said.
The emphasis on strengthening public finances in the central bank’s report is “eye catching because it’s explicit,” de la Fuente said.
The government may propose legislation that would boost tax collection to make up for falling oil production as part of the 2010 budget proposal in September, Finance Minister Agustin Carstens said earlier this month.
S&P cut its outlook on Mexico’s foreign debt because of greater “fiscal vulnerabilities” due to the government’s failure to raise taxes and ease dependence on oil income.
The recession will lead to a loss of as many as 735,000 formal jobs this year, the bank said.
To contact the reporter on this story: Jens Erik Gould in Mexico City at jgould9(at)bloomberg.net; Hugh Collins in Mexico City at hcollins8(at)bloomberg.net |
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