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Mexico's Economy Giving Brazil, China a Run for their Money

Oct. 1, 2012
Average manufacturing wages, when adjusted to productivity, were $3.06 an hour in Mexico in 2010 compared to $2.72 in China, he said. By 2015, they will rise to $5.30 in China and just $3.55 in Mexico.

Here's a bold prediction for 2022: Mexico will beat Brazil.

Some analysts say 2022 may actually be the year when Mexico moves past Brazil to become Latin America's biggest economy.

And Brazil is not the only global powerhouse that Mexico is challenging. China's rising wages are making Mexico an increasingly attractive location for manufacturers, who are flocking here despite a relentless drug war.

The country's rising fortune has inspired a series of optimistic notes by analysts from some of the world's biggest financial firms.

"We forecast that Mexico may overtake Brazil as the No.1 economy in Latin America as early as 2022, on the back of strong growth in human capital and total factor productivity," Nomura Group analysts wrote last month.

"Embarking on a trajectory of high growth will mark the birth of the first, not tiger, but 'jaguar' country in Latam."

Mexico posted growth of 3.9% in 2011 and the central bank is forecasting growth of as much as 4.25% this year. Brazil's growth slowed to 2.7% last year, while a mere 1.6% is forecast for this year.

Brazil's slowdown came after it enjoyed a "golden decade" fueled by China's appetite for commodities following the Asian giant's entry into the World Trade Organization in 2001, Nomura stated in a previous note in May.

Cheaper to Produce in Mexico than China?

Mexico, meanwhile, is at "the dawn of a new era" as more and more manufacturers set up shop here due to China's growing labor costs, the Asia-based financial firm added.

The Boston Consulting Group, a global management consulting firm, says it could already be cheaper to produce in Mexico than in China.

"We believe that this year ... the costs of producing in Mexico are the same or lower than the costs of producing in China," said Hal Sirkin, a senior partner at the Boston Consulting Group.

Average manufacturing wages, when adjusted to productivity, were $3.06 an hour in Mexico in 2010 compared to $2.72 in China, he said. By 2015, they will rise to $5.30 in China and just $3.55 in Mexico.

Sharing a border with the United States, the world's biggest importer, has helped too. But reliance on the United States has its risks.

"The substantive role that external conditions have played in Mexico's economic recovery makes their eventual weakening a fundamental risk," said Mexican central bank deputy governor Manuel Sanchez.

"In particular, if U.S. industrial production slows, Mexican manufacturing exports may decelerate notably," he said in New York on Friday, according to a copy of his speech.

Barclay's bank analyst Marco Oviedo wrote on September 6 that, after lagging Chinese manufacturing exports for a decade, Mexico took the lead after 2008-2009.

"We believe this change is likely to be structural and persistent," Oviedo wrote.

Mexico 4th Largest Auto Exporter

Mexico became the world's fourth biggest car exporter this year, jumping from fifth place, and other industries are increasingly moving production here, from aerospace to electronics and telecommunications.

This year alone, Nissan, Ford, and BMW announced plans to open new factories or increase production in Mexico.

Audi became this month the latest auto maker to decide to set up shop in Mexico. The plant in San Jose Chiapa, central Mexico, will create 3,000 to 4,000 jobs and produce 150,000 cars a year when it opens in 2016.

"This will allow us to ship our cars duty free to the USA, Latin America and Europe,"  said Uwe Hans Werner, an Audi spokesman. "This decision will lower our costs and increase our profit margins and will give us a definite competitive advantage with customers."

Manufacturers keep coming even though Mexico has endured a wave of drug-related violence that has killed some 60,000 people in the last six years. "Some are saying 'we will take the risk' and others say 'we don't want to take the risk if violence goes out of control,'" Sirkin said. "This is one of the issues companies think about."

The violence has weighed on Mexico's economic output. The national statistics institute said Thursday that crime cost the economy 211.9 billion pesos (US$16.5 billion) in 2011, or 1.38% of gross domestic product.

-Laurent Thomet, AFP

Copyright Agence France-Presse, 2012

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