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26/11/2010 | Mexican Economy Slows Down in Q3

Global Insight Staff

The expected slowdown of the Mexican economy materialised in the third quarter of 2010 as GDP expanded only 0.7%, down from a revised 2.3% in the second quarter, with deceleration of industrial production in the United States the main driver.

 

IHS Global Insight Perspective

Significance: On a seasonally adjusted basis, Mexican GDP increased 0.7% in the third quarter of 2010 as compared to April–June.

Implications: Growth in the third quarter represents a clear deceleration from the 2.3% rate posted in the second quarter of 2010, and is the result of the slowdown in the U.S. economy since the Mexican economy depends heavily on its northern neighbour.

Outlook: In the very short term—the fourth quarter of this year and the first quarter of 2011—Mexico's economy will grow at a sluggish pace, following the U.S. business cycle, and will accelerate later in 2011, although poor oil production will further constrain economic activity.

The National Statistics Office (INEGI) reports that seasonally adjusted GDP expanded 0.7% in the third quarter of the year as compared to the previous quarter; raw data show that GDP increased 5.3% in July–September when compared to the same period in 2009. The quarter-on-quarter (q/q) comparison shows a marked deceleration from the second quarter, when GDP expanded 2.3%, and also signals the return of moderate growth and the end of the bounce-back from the 2009 recession. While Mexico's output rate has not yet returned to pre-crisis levels, the rate of expansion has moderated because the U.S. economy is also moving at a slower speed. The United States is not only the destination of 80% of Mexican exports, but also the source of a sizeable amount of workers' remittances and tourism revenues.

INEGI reports that the service sector grew 1.8%, while the industrial sector expanded 0.9% and primary activities such as agriculture and fishing increased 1.5%. All these numbers refer to q/q growth on seasonally adjusted data; clearly it is not possible for each and every sector to grow faster than the whole economy (for a note on statistical discrepancy .These figures are preliminary and will be revised, as was the case with the second-quarter growth rate, which was initially reported as 3.2% and has just been revised down to 2.3%; this revision was accurately predicted when data were published. Despite the fuzzy figures, the relative numbers paint a picture with industry (the sector that depends heavily on demand from the United States) running at the lowest pace while services, which are relatively more closely linked to domestic demand, expanding more rapidly. In the recovery from the 2009 recession, domestic consumption was growing at a slower pace, and while there has been more dynamism in July–September, at IHS Global Insight we expect that in the upcoming quarters the service sector will decelerate in tune with lower industrial production, caused, in part, by lower external demand.

The monthly index for economic activity (IGAE), a very good proxy for GDP, posted positive growth in July and August but had already declined in September, signalling that Mexico is already moving to sluggish growth.

Retail Sales Flat in September

Mexican real retail sales increased by 4.1% during September compared with September 2009 (year-on-year—y/y), according to INEGI. On a seasonally adjusted basis, however, retail sales were down 0.08% compared with the previous month. In a different but related data release, INEGI made it known that income in the service sector (ISS) grew 4.9% y/y in September, up from 3.8% y/y in August but still below pre-crisis levels: it is 3.0% below September 2008. This indicator purports to capture sales of private non-financial services. On a seasonally adjusted basis, ISS expanded 0.6% as compared to August, the seventh consecutive month of positive growth. Retail sales data confirm the aforementioned deceleration of the economy and show that the domestic market is already suffering from the slowdown in the industrial sector. Data on income in the service sector still show some dynamism, but this will vanish shortly as it is very difficult for any sector in the Mexican economy to decouple itself from the U.S. business cycle.

Outlook and Implications

Mexico's business cycle is linked to that of the U.S. economy, and once again it will suffer from this dependency as the largest economy of the world is set for sluggish growth in the next two quarters, and just moderate growth for the full year 2011. Another constrain to growth in Mexico will be the decline in oil production. This hurts not only exports and external accounts, but also public finances; expected higher oil prices will partially compensate for the decline in production but the government—which relies on the oil sector for almost one third of its revenue—will still not have the capacity to increase spending and much-needed infrastructure. In the last quarter of 2010, the Mexican economy will be flat with respect to July–September, bringing growth for the full year to 5.1%. For 2011, IHS Global Insight has revised its forecast downward, and GDP growth is now expected to grow 2.9%.

Global Insight (Reino Unido)

 


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