Manufacturing Recovery To Continue Following Temporary Slump

BMI View: We expect the Mexican economic recovery to regain traction in the coming months, following what we believe was a temporary slump in late Q413 and early Q114 due to poor weather in the US that disrupted manufacturing production. A pick-up in new manufacturing goods orders, combined with strong economic data out of the US, reinforce our expectations for the Mexican economy to gain steam in the coming months.

We maintain our forecast for real GDP growth in Mexico to accelerate to 3.3% in 2014 from 1.1% in 2013. While a poor performance early this year after disappointing real GDP growth of 0.7% year-on-year (y-o-y) in Q413 will likely see relatively weak growth in Q114, we expect the economy to improve significantly in the coming months. Indeed, we believe that the factors that drove weak economic activity in recent months were only temporary - namely, poor weather in the US that disrupted shipments and production of Mexican manufactured goods. Moreover, improving retail sales and labour market dynamics in the US point to a renewed bout of US consumer strength ( see 'Jobs Rebound Amidst Mixed PMI Data' March 7), which will further reinforce a manufacturing-led economic recovery in Mexico ( see 'Economy To Regain Steam In The Coming Months', February 24).

We are already seeing signs that Mexico's manufacturing sector is improving. Indeed, industrial production in Mexico grew by 0.7% y-o-y in January, after contracting both in December and January when large portions of the US were hit by poor weather. Moreover, January's industrial production expansion was driven by an uptick in manufacturing production, which grew by 2.5% that month, and will likely continue to expand in the following months amid signs that US demand for Mexican manufactured goods is regaining strength.

Expansion In Industrial Production Suggests The Worst Could Be Over
Mexico - Industrial Production Index And Selected Sub-Components, % chg y-o-y

Manufacturing Recovery To Continue Following Temporary Slump

BMI View: We expect the Mexican economic recovery to regain traction in the coming months, following what we believe was a temporary slump in late Q413 and early Q114 due to poor weather in the US that disrupted manufacturing production. A pick-up in new manufacturing goods orders, combined with strong economic data out of the US, reinforce our expectations for the Mexican economy to gain steam in the coming months.

We maintain our forecast for real GDP growth in Mexico to accelerate to 3.3% in 2014 from 1.1% in 2013. While a poor performance early this year after disappointing real GDP growth of 0.7% year-on-year (y-o-y) in Q413 will likely see relatively weak growth in Q114, we expect the economy to improve significantly in the coming months. Indeed, we believe that the factors that drove weak economic activity in recent months were only temporary - namely, poor weather in the US that disrupted shipments and production of Mexican manufactured goods. Moreover, improving retail sales and labour market dynamics in the US point to a renewed bout of US consumer strength ( see 'Jobs Rebound Amidst Mixed PMI Data' March 7), which will further reinforce a manufacturing-led economic recovery in Mexico ( see 'Economy To Regain Steam In The Coming Months', February 24).

Expansion In Industrial Production Suggests The Worst Could Be Over
Mexico - Industrial Production Index And Selected Sub-Components, % chg y-o-y

We are already seeing signs that Mexico's manufacturing sector is improving. Indeed, industrial production in Mexico grew by 0.7% y-o-y in January, after contracting both in December and January when large portions of the US were hit by poor weather. Moreover, January's industrial production expansion was driven by an uptick in manufacturing production, which grew by 2.5% that month, and will likely continue to expand in the following months amid signs that US demand for Mexican manufactured goods is regaining strength.

Manufacturing Confidence Improvement Reaffirms Economic Recovery
Mexico - IMEF Manufacturing Confidence Index And Selected Sub-Components

Furthermore, Mexico's IMEF Manufacturing Confidence Index picked up in February at 51.3, above the 50.0 benchmark level that suggests expansionary conditions in the sector. Notably, new manufacturing orders in February also expanded, which points to stronger production in the ensuing months, and reaffirms our view that the recent economic slump is only temporary.

Risks To Outlook

There are two main factors that could see the recovery in Mexico fall off track. First, while there are signs that the construction sector continues to slowly recover from the effects of the homebuilders crisis that began in 2012, we cannot rule out further deterioration as a number of companies face bankruptcy and government support remains insufficient ( see 'Industry Forecast - Infrastructure & Construction - Q2 2014', March 5). Further construction sector weakness would weigh on overall economic activity, given that the sector is a major generator of employment.

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