Headline: Fox Says Mexico Is in a Recession; Closely linked to the U.S., the government lowers the economic growth target

Source: Los Angeles Times, 21 June 2001

URL: http://www.latimes.com/business/20010621/t000051331.html

MEXICO CITY--Mexican President Vicente Fox finally uttered the "R-word," saying publicly for the first time what economists have known for weeks: Mexico is in a recession brought about by U.S. economic woes.

Mexico had been an island of stability this year among troubled Latin American economies. Mexico's inflation and interest rates are down, while investor confidence is up, leading to a rising tide of foreign capital flowing in and a strong peso.

Speaking to cattlemen Tuesday, Fox said the economy "is in a recession and in a jam." Fox was understandably reluctant to say the word since a prolonged recession will create political problems. At the beginning of this year, he promised the economy would generate 1.3 million new jobs in 2001, but so far there has been a net loss of 400,000 jobs.

"This is the first time that Fox is setting his foot on reality. He's about six months behind the times," said Rogelio Ramirez de la O, an economist with Ecanal of Mexico City, a business consulting firm. He said he expects the recession to extend through the quarter ending this month. Economic growth for 2001 could be as low as 1.3%, he said, but other economists hew closer to the government line of more than 2% growth.

Mexico is highly dependent on the United States where 88% of its exports are sold. As the U.S. economic situation has worsened, so has Mexico's. Fox's statement came as the government revised its economic growth target downward by a half percentage point to between 2% and 2.5%, down from about 5% at the beginning of the year.

Even that target may be optimistic. Meeting it will depend on the strength and timing of a U.S. recovery and a corresponding increase in demand for Mexican exports, said Ramirez de la O.

The Mexican economy shrank by about a half percentage point during last year's fourth quarter, another half point in the first quarter of 2001 and could remain stagnant through the three months ending June 30, said Alfredo Coutino, a macro-economist at Ciemex-Wefa, a nonpartisan think tank in Philadelphia.

There are reasons for pessimism that Mexico won't make the reduced growth target, especially in manufacturing. Several major employers have announced layoffs in recent weeks and industrial output is expected to shrink by 3% for the current quarter compared with the same quarter last year. Ramirez de la O notes some manufacturers including Hewlett-Packard and DaimlerChrysler are cutting back on their Mexico operations.

For now, foreign direct investment in Mexico is booming. It could reach $14 billion this year, not including the $6.25-billion cash portion of the $12.5-billion price Citigroup is expected to pay for Grupo Financiero Banamex-Accival, parent of Mexico's largest independent banks.

Jonathan Heath, chief economist at LatinSource Mexico, another consulting firm, said even unfavorable signs point toward Mexico evolving into a more "normal economy." "Yes, we are on the downside of a cycle, but it's one of stability, not these boom-to-bust cycles we had before. That's why foreign investment continues to come to Mexico. People are looking at the mid-term and long-term future, not the short term," Heath said.

Meanwhile Wednesday, the Mexican stock market rebounded after four days of losses tied partly to fears of an Argentine currency devaluation. Mexico's IPC share index gained 1.5% to 6,455.15. Argentina's main share index, the Merval, inched up 0.4%.

In Brazil, the Bovespa index added 1.2%. Brazil's currency, the real, strengthened slightly Wednesday after hitting a record low against the U.S. dollar on Tuesday. The real has been pounded by Brazil's economic problems and, lately, by worries over Argentina's troubles. The Brazilian central bank raised interest rates more than expected Wednesday, to a one-year high, in an effort to protect the real and halt a surge in inflation. The bank raised its benchmark overnight lending rate to 18.25% from 16.75%, the fourth increase in three months. But policymakers also suggested that the increase might be the last, if the real strengthens.

-- Andre Weltman (aweltman@state.pa.us), June 21, 2001

Answers

But the R-word is sooo... much better than the D-word.

-- David Williams (DAVIDWILL@prodigy.net), June 22, 2001.

Oh no, nobody in a position of political authority will utter the "D" word until long after the event...if ever. It's both a face-saving attempt to calm the public, as well as massive denial on their own part psychologically. "Denial, it's not just a river in Egypt..."

Reminds me of various Monty Python skits where people cheerfully deny massive wounds -- the classic example is the Black Knight in _Holy Grail_, who has all his arms and legs progressively hacked off by King Arthur but still wants to fight on..."It's just a flesh wound" he chirps as the arterial blood spurts out. The king finally says to the torso on the ground, "What are you going to do, bleed on me?"

-- Andre Weltman (aweltman@state.pa.us), June 22, 2001.