Manufacturing-Led Recovery On Track

BMI View: Recently-released Mexican Q313 GDP data reaffirms our expectations for a manufacturing-led recovery to continue to gain traction over the coming months. While construction output continues to contract, we expect the sector to begin a gradual recovery in 2014 as infrastructure stimulus comes on line and ongoing project delays are addressed, contributing to an acceleration in the Mexican economy next year.

We believe that the Mexican economy, after deteriorating sharply throughout most of 2013, is approaching an inflection point and is set to improve significantly in 2014. Real GDP growth in Q313 came in at 1.3% year-on-year (y-o-y), down from 1.6% (revised up from 1.5%) y-o-y in Q213. However, we believe that a stronger manufacturing sector will drive faster real GDP growth in Q413 and into 2014. While a contracting construction sector will continue to weigh on the economy in the near term, we expect a gradual recovery in the sector to take place next year. We therefore forecast real GDP growth to accelerate from 1.6% in 2013 to 3.3% in 2014.

Manufacturing Sector Will Take Off

The Worst Is Over
Mexico - Real GDP Growth, % chg y-o-y

Manufacturing-Led Recovery On Track

BMI View: Recently-released Mexican Q313 GDP data reaffirms our expectations for a manufacturing-led recovery to continue to gain traction over the coming months. While construction output continues to contract, we expect the sector to begin a gradual recovery in 2014 as infrastructure stimulus comes on line and ongoing project delays are addressed, contributing to an acceleration in the Mexican economy next year.

We believe that the Mexican economy, after deteriorating sharply throughout most of 2013, is approaching an inflection point and is set to improve significantly in 2014. Real GDP growth in Q313 came in at 1.3% year-on-year (y-o-y), down from 1.6% (revised up from 1.5%) y-o-y in Q213. However, we believe that a stronger manufacturing sector will drive faster real GDP growth in Q413 and into 2014. While a contracting construction sector will continue to weigh on the economy in the near term, we expect a gradual recovery in the sector to take place next year. We therefore forecast real GDP growth to accelerate from 1.6% in 2013 to 3.3% in 2014.

The Worst Is Over
Mexico - Real GDP Growth, % chg y-o-y

Manufacturing Sector Will Take Off

After expanding by only 0.4% y-o-y in real terms in H113, we expect Mexican manufacturing sector output to improve over the coming months, driven by a stronger US consumer. Indeed, we believe that more positive labour dynamics and stronger confidence levels will see US household spending growth accelerate in 2014 ( see 'GDP Set To Accelerate In 2014', October 4). The manufacturing sector already picked up modestly in Q313, growing by 2.9% y-o-y, and greater US demand bodes well for future growth. Mexico's key auto sector will be a main driver of growth in manufacturing, with car makers such as Nissan and Chrysler expanding their production capacity in the country this year. Light vehicle exports expanded by 11.0% y-o-y in October, significantly stronger than in H113, and our Autos team expects an even faster expansion in 2014 ( see 'Export Led Growth Continues', November 11), which will contribute to an acceleration in real GDP growth.

Manufacturing Driving Growth, Construction Revival Next Year
Mexico - Real GDP And Selected Sectors' Growth, % chg y-o-y

Construction Sector Will Slowly Improve In 2014

The construction sector, on the other hand, has been the economy's main underperformer, contracting by 6.9% y-o-y in Q312. While we still see some downside for the construction sector in Q413 and potentially in Q114, we expect a gradual recovery to take hold in 2014 as infrastructure stimulus feeds through and ongoing project delays are addressed ( see 'Infrastructure Revival View Still In Place, But Timing Delayed', October 29). Indeed, President Enrique Peña Nieto's US$315bn National Infrastructure Plan will finance new projects, and the government recently allocated additional funds in its 2014 budget to address delays on current projects.

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