Mexican Economy Expands 4.1% in Q2

Slowdown Mirrors US Business Cycle

Recent reports show that the United States economy grew 2.0% and 1.5% in the first and second quarter respectively. This pattern was echoed by the Mexican economy, although the deceleration was less pronounced south of the US border than anticipated as consumer confidence in Mexico improves. This translates into relatively robust private consumption. The always volatile primary sector (primarily agriculture) jumped 9.5% year-on-year (y/y) as the base of comparison was relatively low due to poor results in the second quarter of 2011. Mexico's industry expanded 3.6% y/y as strong growth in Manufacturing and Construction was partially offset by poor performance in Utilities and Mining (see Mexico: 14 August 2012: Manufacturing and Construction Continue to Drive Growth in Mexican Industry). Manufacturing and in particular production of automobiles was the key driver of growth, with production of cars soaring in the first half of the year and data for July showing a faster expansion—almost 18%—and higher exports explain this growth, in turn, fueled by higher demand from the US. Mining figures are not expected to bring good news in the near future as we do not expect oil output to increase in the foreseeable future; meanwhile, construction has shown solid growth in recent quarters. This is good news illustrating improvements in business confidence. GDP in the service sector increased 4.5% on good performances of commerce and finance.

Unlike most countries, the National Statistics Office of Mexico (INEGI) does not release simultaneously the demand side of GDP (expenditure approach), but preliminary data shows investment growing at an average 8.0% y/y in April and May. As in previous quarters, investment in machinery and equipment drove overall growth up 11% and on a very positive note investment in construction also posted robust growth up 5%. This is consistent with the aforementioned supply-side data or GDP in the construction sector. Strong growth in commerce and data for retail sales and consumer confidence suggests that private consumption has been strong and an important driver of Mexico's overall expansion. Public finances also show a moderate-to-strong expansion in government spending, which was expected due to the so-capped political business cycles when governments try to accelerate the execution of public works and spending prior to elections.

Outlook and Implications

In the first half of 2012, Mexico's economy has sustained the pace of growth recorded in 2011 and while the second quarter shows deceleration, we at IHS Global Insight still believe it is a relatively robust one. There is no such thing as decoupling —from the world or the US economy—but there are some factors that benefit Mexico's economic growth: The all important automotive sector continues to grow at double-digit rates driven by the demand from the US. Both the recovery of light vehicle sales in the US—still well below pre-crisis levels— and the fact that Mexico continues to gain a share in the US market support this good performance of Mexican automakers. Another positive development is the sustained improvement in consumer confidence that translates into robust growth in private consumption; labour market indicators are mixed as unemployment has not improved but formal job creation accelerated; half a million new formal jobs were created between January and June 2012 up from 382,000 in the same months of 2011. Mexico is on its way to create 800,000 new jobs this year, which would be a record high.

The outlook for Mexico's economy in the second half of 2012 and in 2013 is one of deceleration, in tune with the US business cycle and also because we assume government spending will moderate in the upcoming quarters. Our US Macroeconomic team at IHS Global Insight forecasts the US economy will grow 2.0% this year, before slowing down to 1.8% in 2013. Our latest forecast calls for Mexico's GDP to expand 4.0% this year and 3.6% in 2013.