Mexico: Clinging to Frayed U.S. Coattails

Mexico is struggling with the drag coming from the slowdown in the U.S., its biggest trading partner. For the second time in two weeks, the Bank of Mexico said on July 31 that it was revising down its 2001 forecast for real gross domestic product growth.

The bank now expects the economy to grow less than 2% this year, a significant drop from last year's 6.9% expansion. The bank's survey of two dozen private economists and analysts shows they are expecting just 1.7% growth.

In an effort to stimulate the economy, the bank eased monetary policy on July 31 for the second time in two months. The bank said it was able to cut interest rates because the strong peso has kept inflation low. Consumer prices were up just 6.6% in the year ended in June, compared with 9.4% in June, 2000.

Exporters are hoping the move will weaken the peso, which has appreciated some 5% against the U.S. dollar so far this year, making Mexican goods more expensive in the U.S., which buys 88% of all Mexico's exports. Exports fell 4.4% in June compared with a year ago.

But imports tumbled by a larger 5.6%, because domestic demand is sagging. Retail sales in May were up only 3.5% from a year ago, down from April's 4.6% advance and March's 10.1% rapid clip.

Other monthly data confirm the economy is very weak. The government's Indicator of Economic Activity, a monthly proxy for GDP growth, fell 0.14% in May from April, or 0.4% below its reading of May, 2000 (chart). Drops in manufacturing, construction, mining, and agriculture offset gains in services and electric power production.

Also in May, factory jobs fell for the seventh month in a row, due largely to the U.S. slowdown. A number of exporters have idled operations for periods of several days or weeks to cope with lagging U.S. demand. Maquiladoras, the for-export assembly plants largely clustered along the Mexico-U.S. border, have slashed more than 60,000 jobs so far this year.

By James C. Cooper & Kathleen Madigan

With Geri Smith in Mexico City

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