Mexico's economic recovery

A one-two punch

May 27th 2010 | MONTERREY

From The Economist print edition

Just as business perks up after the recession, it is threatened by crime

FOR over a century Monterrey, in Mexico’s rocky and seemingly inhospitable north, has prided itself on being the country’s industrial capital and economic motor. It got rich making beer, steel, glass and cement. Today its quick access to both coasts of the United States enables it to export car parts, home appliances and aerospace components. At $16,000 per head, average income in the city of 3.7m people is twice the national average.

Last year this closeness to the United States did not seem like such a blessing. Mexico’s economy fared worse than any other in the Americas during the recession—it shrank by 9.7% in the year to June 2009—and its export-oriented north was the most affected area. In Nuevo León, the border state in which Monterrey lies, some 40,000 manufacturing jobs were lost in nine grim months from September 2008.

Now that the American economy has stirred back to life, Mexico’s factories are whirring into action as well. The country’s GDP grew by 4.3% year-on-year in the first quarter of 2010, beating forecasts. Industrial production rose by 7.6% in the year to March—the largest annual increase in nearly four years. In Nuevo León, manufacturing jobs are returning to pre-recession levels. Across all sectors, nearly twice as many jobs have been created there this year as were lost in 2009. Mexico’s car exports are at their highest since 1994.

Yet despite such encouraging figures, expectations are restrained. The Economist Intelligence Unit, our sister company, predicts that the economy will grow by 4.3% this year but just 2.7% in 2011. Domestic demand has been depressed by lay-offs and declining remittances. Car sales within Mexico, for example, are at their lowest in over a decade. Once consumers’ appetites do recover, inflation is expected to rise. That would force the central bank to raise interest rates, which would reduce growth.

This leaves exporters in places like Monterrey to lead the rebound, as they did after Mexico’s last recession in 1995. But those businesses have a new hurdle to surmount: the country’s raging drug “war”.

Territorial squabbles between traffickers are now affecting city life. Since last year, main roads in Monterrey have regularly been blockaded by members of the Gulf “cartel” or its estranged former enforcers, the Zetas, to prevent police from reaching crime scenes. In March, two students were killed in a shoot-out at the city’s leading university between the army and suspected gangsters. The following month, gunmen kidnapped five people from a downtown Holiday Inn.

Foreign investment in Nuevo León held steady last year, at $1.4 billion. But visitors are staying away. Hotels are less than half full: almost every week a business conference or international sporting event is cancelled. Among the missing visitors are the certifiers and auditors companies need to conduct their operations.
Medical tourism, an important new industry in Monterrey, held up well during the recession. But the fear of violence is now keeping patients away. At Christus Muguerza, a gleaming chain of hospitals where a new knee costs barely half what it would in the United States, business is down by a quarter on last year.

For now most firms are sticking it out, but they are anxious. A survey published in March by the American Chamber of Commerce of Mexico found that over a quarter of its members were reconsidering investments in the country as a result of safety worries. Some 16% had suffered extortion and 13% kidnappings. Companies based in the northern border region, and near Mexico City, felt least safe. Unless security improves, Mexico’s nascent economic recovery will be held back.

• An interview with Javier Treviño, the secretary general of Nuevo León:
http://audiovideo.economist.com/?fr_story=73dc875cf722677631dc66ae455992beea1d9729&rf=bm