A black April for Mexican economy

By Fernanda Belchior, Assistant Editor, PPI Latin America, RISI

SAO PAULO, June 25, 2009 (Viewpoint) - It is no news that Mexico has been suffering the consequences of the financial recession of its major trade partner. the USA. But a bad combination of weak local demand, global downturn, flu outbreak and timing of Easter week in April turned the mentioned month into the "black sheep" so far for the country's economic performance.

Most of the sectors that decelerated the most are related to the packaging paper end uses: appliances, electronic devices, automotive parts, and other products for shipment to the domestic market and export by "maquiladora" plants along the border to the USA. "There is no secondary fiber supply as the local market activity is down, pushed by the flu. Mexico 'stopped' during four days in late April early May because of the influenza and reduced wastepaper collection by 5-8%," a source reported..

Mexico's official statistics confirm what the local paper market says. The country's industrial activity dropped 13.2% in April from a year ago, the worst month of near-term industrial production in the country since 1995. In the first four months of this year, Mexico's industrial activity dropped 10.7% over the same period of 2008. The figure is also worse than 1995's performance when the country registered a decrease of 4.7% on the year-earlier period.

Going deeper into the country's official data, it is possible to see that the local manufacturing sector activity slumped 18% while manufactured products exports dropped 31.6% in April 2009 over April 2008 as US consumers pulled back on spending for "big ticket" items. The low expectations on Mexico's economic growth has deeply affected private investors' decisions to spend money in the country.

But what did really happen in April to ,make the Mexico economy struggle in these terms? The Easter week at the end of that month is when people traditionally take vacation. In a mostly Catholic country, it's time to relax and celebrate, not to consume paper.

When the Influenza A (H1N1) outbreak spread t in Mexico in late April- early May, the federal government formally asked companies, industries, restaurants and other public institutions to stop operating in order to avoid further contamination.

As people were already inclined to stay at home, the country's economic activity level consistently dropped in those months. Without consumer spending and labor activity, paper and board demand has consequently fallen. Consumer tissue was likely the only paper grade to report stable or increasing consumption as residents used more facial tissue and towels because of the flu outbreak. On the other hand, lower tourism, workplace activity and restaurant dining may have hurt demand for commercial tissue. For the remaining paper and paperboard products, the decline in demand has been dramatic.

May economic figures haven't been released yet by the Mexican government but local analysts don't expect a better economic scenario mainly due to a disappointing performance of the US automotive sector. Mexican auto production was down 41% in the first quarter compared with a year ago. Again, this is bad news for the local paper industry, which produces packaging paper for this industry.

It's difficult to predict what's going to happen in the coming months in terms of demand in Mexico. The only thing known is that the Mexican paper and board industry still has enormous obstacles ahead.