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U.S. economic woes weigh on Mexico

Mexico indicated Wednesday it expects the downturn in the U.S. will mean much slower growth this year for its own economy.
/ Source: The Associated Press

Mexico indicated Wednesday it expects the downturn in the U.S. will mean much slower growth this year for its own economy, which depends on its northern neighbor for the bulk of its trade and investment.

The Treasury Department said it was lowering its forecast for Mexico's 2008 economic growth to 2.8 percent from 3.7 percent — a 24 percent drop.

"It is expected that the prevalent international economic scenario in 2008 will be less favorable for Mexico than what was anticipated," the department said in a report posted on its Web site.

Mexico's gross domestic product is expected to have grown about 3.2 percent last year, the department said.

More than any other country in Latin America, Mexico's economic fate is tied to the U.S., its partner in the North American Free Trade Agreement. Mexico sends more than 80 percent of its exports to the U.S., which is also Mexico's largest source of direct foreign investment and remittances.

Mexico's central bank on Wednesday also lowered its growth estimate by half a percentage point — to between 2.75 percent and 3.25 percent, compared to its previous estimate of 3.25 percent to 3.75 percent — also citing the U.S. downturn.

Banco de Mexico said it expects there will be 620,000 jobs created in the formal economy this year, down from 756,000 in 2008.

The bank also said remittances from Mexicans living abroad — the country's second-largest source of foreign income after oil — had increased by a modest 1 percent last year compared with 2006, to $23.9 billion.

The lowered Mexican growth projections came on the same day the U.S. Commerce Department announced a growth rate of just 0.6 percent for the fourth quarter of 2007, the worst rate since 2002. Some fear a recession as U.S. growth has stalled due to the ailing housing market and credit tightening.

The Treasury Department said, however, there are "diverse factors that will mitigate the effects" of the slowing U.S. and global economy. It cited strong Mexican economic policies, increased spending on infrastructure, housing and other sectors, and anticipated high oil revenues.

If it were not for those factors offsetting the U.S. slowdown, "the effect would have been much worse," said Mauricio Gonzalez, president of the Mexico-based analysis firm Grupo Economistas Asociados.

Latin America — especially Mexico — has always been hit hard by U.S. economic downturns. The region as a whole directs 50 percent of its exports to the United States, said Keiji Inoue, an economist at the United Nations.

But Latin America is less vulnerable than in past crises, when a case of the sniffles in the U.S. economy prompted full-blown pneumonia across the region, economists say.

One of Mexico's strongest weapons is a huge public-private infrastructure plan proposed by President Felipe Calderon, who promised the government would spend $39 billion annually over his six-year term on roads, bridges, seaports, dams, and oil installations.

Calderon noted the coming difficult times for the U.S. and global economy.

"What we do not want is that this puts the brakes on the Mexican economy," he said.

In addition to Mexico's infrastructure plan, the country is "revving the motors of our economy" with housing-construction projects, credit-lending programs, tourism development and diversification of its export markets, Calderon said earlier this month at a ceremony marking the start of construction on an $800 million dam.

Such factors will indeed help to lessen the impact of the United States' economic woes on Mexico, said Gonzalez, who noted that when former President Vicente Fox's term began in 2000, Mexico's growth rate dropped from about 6 percent to zero growth due to a U.S. drop from 3 percent to 1 percent.

"That was not even a recession," he said. "This time it's not going to be that way."

If the U.S. does slip into a recession, the United Nations predicts Latin America as a whole would grow by only 2.6 percent, while Mexico's growth would slow to about 1 percent, said chief U.N. economist Robert Vos.

"That the U.S. downturn will affect us — there can be no doubt," Gonzalez said. .