Mexico's Woes Will Hurt US Exports and Output
THE continued devaluation of the Mexican peso may mean ``siesta'' time for sizzling trade south of the border. An export slowdown could reduce the United States economic performance this year by 0.25 to 0.33 of a percentage point.
That amounts roughly to a loss of around $16 billion to $22.6 billion in output.
At least that's the initial view of economists still in the process of trying to figure out how much damage the peso collapse has done to the giant US economy. Figuring the impact of the devaluation is not easy, since the Mexican peso is still falling. On Tuesday, for example, the peso dropped another 6 percent, to 5.74 to the dollar. Since Dec. 20, the peso has fallen about 40 percent compared with the dollar.
Economists expect the peso turmoil to start to affect US trade with Mexico quickly. ``There could be a very short-term ripple effect as our exports to Mexico slow down for a couple of quarters,'' says Veronika White, an economist at First Fidelity Bancorporation in Philadelphia.
The trouble in Mexico may also mean a slowdown in exports to other Latin countries, warns economist Bob Dederick, a consultant to Chicago-based Northern Trust Company. Brazil and Argentina might slow down their own economies, ``so they don't get tagged as another Mexico,'' he explains. In fact, on Tuesday, Argentina's Minister of the Economy said the government would cut spending.
David Blond, the Washington-based director of international trade forecasting for consulting firm DRI-McGraw Hill, says he was surprised when his computer model indicated that exports to Mexico could drop by as much as 18 percent. The largest potential drop could be in consumer goods, as US companies hike their prices in Mexico to adjust for the devaluation. The DRI model indicated a slowdown in such exports as clothing, toys, furniture, and processed foods.
``It varies by product, but exports come back the following year closer to what it was before,'' Mr. Blond says.
The Mexican fallout is likely to go beyond the trade arena. The Mexican bolsa - the stock market - is tumbling as well. Gary Hufbauer, an economist with the Washington-based Institute for International Economics, estimates that the Mexican markets have lost $10 billion to $15 billion in assets value so far. Since many US mutual funds have investments in the Mexican markets, some of the losses will be reflected in investors' statements.
``Probably more people will remember the collapse of the bolsa more than the loss in exports over the next year,'' he says.
In fact, there is some discussion that the Federal Reserve might want to postpone any new interest-rate hikes to avoid jolting the Mexican peso further. ``External factors have rarely played a role in the Fed's policy decisions, but Mexico's plight may moderate their present plans,'' says Brian Fabbri, an economist with Paribas Capital Markets.
However, some economists say there will not be much of an impact on the US economy at all. Senior economist John Ryding of Bear Stearns & Co. in New York says US companies may divert their exports to Japan or Europe, where the economies are steadily improving. He says estimates of export losses ``probably overstate the impact on the US.''
Businesspeople say it is still too early to guess the impact. In Mexico City, James Ostrowski, chief executive officer of Sara Lee Knit Products Latin America Group, says he expects a slowdown in sales. ``It will have a negative impact on my business, but it is more complex than that,'' says Mr. Ostrowski, who sells US-made Hanes underwear.
The devaluation may force some competitors out of the market. Alternatively, the Mexican factories close to the border may gain sales, which could mean higher consumption in that area. ``Whether we will appeal to the same universe remains to be determined,'' he says.
Scott Matovich, international director of sales at Bennett XRAY Technologies in Copiague, N.Y., says he does not expect any impact from the currency turmoil other than a slight postponement in sales of its X-ray equipment. ``The medical industry is one area they are trying to excel in and grow very quickly, so we don't think we'll lose any sales,'' he says.