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http://www.latimes.com/business/la-000066370aug16.story?coll=la%2Dheadlines%2Dbusiness

Mexico Sees No Swift End to Recession

Economy: The U.S. slowdown is having an impact on the country's industrial output, consumption and jobs. By CHRIS KRAUL TIMES STAFF WRITER

August 16 2001

MEXICO CITY -- Dragged down by its dependency on the slumping U.S. economy, Mexico registered its ninth month of recession in June amid waning hopes for a quick recovery and fears that illegal immigration to the United States could increase.

After predicting 5% economic growth and 1.3 million new jobs this year, Mexican President Vicente Fox now confronts a much harsher reality. Economists say his economy will be lucky to grow 1.5% or end the year with as many jobs as he started it with.

In a country that needs 1 million new jobs each year to keep pace with population growth, the employment picture is especially worrisome, both for Fox's continued high approval ratings and for the impact on U.S. immigration. Some experts estimate that half of all young Mexicans unable to find jobs end up migrating to El Norte. "We are losing jobs in agriculture, maquiladoras, restaurants and retail. So we have more unemployed people and that puts pressure on immigration," said Alfredo Coutino, a macro-economist with Ciemex-Wefa, a Philadelphia think tank specializing in Mexico.

Mexico's output of goods and services for the three months ended June 30 was absolutely flat--0.0%--compared with the same quarter last year and was 0.25% less than the first quarter of this year, according to figures released by the government Wednesday. Industrial output, consumption and jobs are all in decline.

The recently ended quarter is the third in a row in which Mexico's economic output shrank in seasonally adjusted terms.

The adverse economic news seems to run counter to the increasingly positive perception that Mexico enjoys on Wall Street. That is partly because Mexico has tamed inflation to the point it could sink as low as 5.5% this year, the lowest since 1972. The peso remains strong, and unlike elsewhere in Latin America, Mexican stocks and bonds have gained in value this year.

Despite investor nervousness about South America in light of a possible economic meltdown in Argentina, Mexico continues to inspire confidence. Economy Minister Luis Ernesto Derbez said Mexico could receive as much as $13 billion in foreign direct investment this year, a remarkable vote of confidence.

And that doesn't include the $12.5 billion Citibank is paying for Banamex, the largest independent Mexican bank.

But the feeling on the street here is much gloomier, as the effects of the ongoing recession reach more and more Mexicans.

"Sales have decreased by 50% this year, so commissions are terrible," said Dayanira Alcaraz, a 21-year-old saleswoman at Aca Joe's men's store in a shopping center in the Coyoacan area of Mexico City. "There are five people working in the store now, and there used to be 11."

Acupuncturist Federico Mendiola, 37, of Mexico City said his business has deteriorated. "People are going less to the doctor because they have less money to spend, especially now when kids are going back to school, and they would rather attend to those expenses than tend to their health."

The crux of Mexico's problem is the sluggish U.S. economy, which soaks up 88% of all Mexican exports. As a result of the slowdown of the U.S. economy--expected to post only 1.4% growth this year--Mexico's heavily export-oriented manufacturing sector saw output shrink by 3.6% during the quarter, which translates directly into job losses and lower consumption.

"This shows that the effects of the U.S. slowdown are disproportionately big, with Mexico lacking any other source of growth, apart from manufacturing and exports," said Rogelio Ramirez de la O, an economist with Ecanal consultants in Mexico City.

The nation's maquiladoras, the foreign-run plants that make products mostly for sale in the United States, have lost 60,000 jobs, or about 4% of the total, since late last year, by far the worst slump the sector has seen in almost 20 years. Mexican exports will grow only 3.5% this year after expanding by 15% last year, economists project.

Also hurting the economy is the fact that the Mexican government has cut its budget twice, meaning less spending on public works, a big generator of jobs and economic well-being. Those cuts are a principal reason construction spending in the country was down almost 7% during the second quarter.

De la O and economist Isaac Katz of the Mexican Autonomous Technological Institute said Mexico's recession demonstrates the need to modernize and open up its economy. Labor is too inefficient and energy costs too high, they said.

Fox has proposed a fiscal reform package that would improve tax collections, public works and social spending. He is expected to introduce a sweeping proposal to reform Mexico's energy sector later this year.

Ciemex-Wefa's Coutino expects Mexico's economy to recover by the last quarter of this year. But that assumes U.S. economists are correct in projecting a U.S. turnaround in the third quarter ending in September. Coutino expects the Mexican economy to pick up 400,000 jobs by the end of the year.

Other economists, however, are more pessimistic about jobs. De la O thinks job hemorrhaging will continue, with the Mexican economy losing 1 million jobs and creating a "jobs deficit" for Fox of 2.3 million--the 1.3 million jobs he promised and the 1 million the economy could lose.

"It's not Fox who is to blame, and his popularity so far is not suffering," economist Katz said. "The problem is we are strongly integrated into the U.S. economy and the downturn there has impacted us very strongly."

Meanwhile, Mexicans such as Teresa Farinas, 22, who runs an export business with her uncle, are adjusting to tougher times. "Money doesn't reach as far because prices have gone up. I'm always looking for ways to earn money. What you don't spend, you earn."

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Alison Trinidad in The Times' Mexico City Bureau contributed to this report.

-- Martin Thompson (mthom1927@aol.com), August 16, 2001