MEXICO'S ECONOMY STAGNATES.

Economic stagnation in Mexico is putting a dent in consumer confidence and will likely have a negative impact on spending into the first half of 2002. A recent monthly survey of economists released by the Central Bank of Mexico (August 2001) projected that Mexico's economy would grow a meager 0.77 percent this year. This contrasts with January's survey results that projected economic expansion would be 3.83 percent in 2001.

A recent Reuters article said that the head of Mexico's central bank, Guillermo Ortiz, believed Mexico's economy-Latin America's second biggest-would grow less than one percent in 2001. The reduced projection is attributed to fallout from the slowdown in sales to Mexico's top trading partner- the United States. More than 80 percent of Mexican exports are destined for the US market. Ortiz, speaking at a conference in New York, said, "It (GDP expansion) will probably be below one percent, something close to what the analysts are predicting." Mexico's economy grew in the first quarter 2001 by 1.9 percent on a year-on-year basis and stayed flat in the second quarter as exporters and builders saw their output shrink.

The reduction in economic activity comes as a substantial setback to President Fox, who had projected that economic activity would be adequate to prevent a setback in consumer confidence. The Mexican government had initially forecast growth of 4.5 percent for the year, but lowered its estimates on several occasions before the economy reached the point of stagnation during the third quarter. In August the president conceded that economic expansion would be under 2 percent for 2001, well below the level of 6.9 percent in 2000.

Ortiz also predicted that by the end of 2001 Mexico's legislature would pass a tax reform package aimed at reducing the country's reliance on oil revenues. "My impression from meetings I've had is that the fiscal reform will pass, but not in the form in which it was originally sent to Congress. It will be a diluted version, but one that should yield more than 1 percent of gross domestic product," he said. The tax reform package involves levying a value added tax on consumer goods which were formerly exempt, and it is difficult to predict to what degree that will negatively impact sales of those goods.