The Incredible Shrinking Mexican Economy

The startling depth of Mexico's recession is coming into view. Reflecting the peso's crash and austerity measures, second-quarter real gross domestic product plunged 10.5% from a year ago, after a 0.6% dip in the first quarter.

The tumble was far worse than the 7% or less that analysts expected--and the largest in the 15 years of quarterly GDP data. The government said the drop was exaggerated by 1994's strong second quarter and by

fewer working days in this year's period. Private forecasters are revising their 1995 projections from a 4% decline to 5% or more.

The good news is that stringent monetary and fiscal policies have stabilized the markets. The peso is holding at about 6.2 to the dollar. Since March, stock prices are up more than 60%, and interest rates are down from 82% to about 35%, reflecting the recent drop in the monthly inflation rate, from 8% in April to 2.04% in July. Fresh foreign capital--crucial to a recovery given the dearth of bank credit--is trickling in again.

Mexico now has more than enough funds to pay off its outstanding tesobonos--dollar-indexed securities. Official capital inflows, mainly loans from the U.S. and the International Monetary Fund, will more than offset net capital outflows this year, and the 1995 trade surplus may end up large enough to balance the current account.

But amid draconian interest rates, cuts in government spending, and a 50% hike in sales taxes, companies have laid off nearly 1 million workers. The official jobless rate was 6.6% in June. Unofficially, unemployment is closer to one in four. Consumer spending, 70% of GDP, has plummeted, with June retail sales off 28% from a year ago.

Analysts expect a further, if less nasty, decline in third-quarter GDP. Meanwhile, President Ernesto Zedillo Ponce de Len is under pressure to loosen the austerity reins. The financial markets eagerly await his first State of the Nation address on Sept. 1, but policy easing is limited by IMF loan guidelines and by the markets' stern discipline.

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