Economic Recovery To Gain Traction In The Coming Months

BMI View: The Mexican economy will accelerate in the coming quarters, following weak growth in 2013 and most of Q114. The main drivers of stronger growth will be greater manufacturing sector production and a recovery in the construction sector. An improvement in both sectors will bolster labour market dynamics and contribute to stronger household spending this year.

Mexican economic activity will pick up in the coming quarters, driven by a rapid expansion of manufacturing sector output and a recovery in the construction sector. Both sectors are key generators of employment, and we expect a decline in unemployment will drive stronger household spending this year. We forecast real GDP growth to accelerate to 3.3% this year from 1.1% in 2013. Real GDP growth in Q114 came in between 1.5% and 2.0%, which implies we expect growth to average between 3.7% year-on-year (y-o-y) and 3.9% y-o-y in Q214 -Q414 in order to hit our full year forecast.

Stronger US Demand Will Support Manufacturing

Economic Activity Growth Will Improve Notably In Q214
Mexico - Industrial Production and Economic Activity (IGAE) Indices

BMI View: The Mexican economy will accelerate in the coming quarters, following weak growth in 2013 and most of Q114. The main drivers of stronger growth will be greater manufacturing sector production and a recovery in the construction sector. An improvement in both sectors will bolster labour market dynamics and contribute to stronger household spending this year.

Mexican economic activity will pick up in the coming quarters, driven by a rapid expansion of manufacturing sector output and a recovery in the construction sector. Both sectors are key generators of employment, and we expect a decline in unemployment will drive stronger household spending this year. We forecast real GDP growth to accelerate to 3.3% this year from 1.1% in 2013. Real GDP growth in Q114 came in between 1.5% and 2.0%, which implies we expect growth to average between 3.7% year-on-year (y-o-y) and 3.9% y-o-y in Q214 -Q414 in order to hit our full year forecast.

Economic Activity Growth Will Improve Notably In Q214
Mexico - Industrial Production and Economic Activity (IGAE) Indices

Stronger US Demand Will Support Manufacturing

The manufacturing sector, which accounted for 16.6% of GDP in 2013, will expand rapidly in the coming months as US consumer demand picks up amid more favourable labour market dynamics ( see 'US Weekly Data Analysis: Rebound Continuing In Q2', May 9). After manufacturing production growth slowed from 4.0% in 2012 to 1.5% in 2013, it re-accelerated to 4.3% y-o-y in Q114, mostly due to strong activity in March, following weather-related disruptions across the US in January and February. We expect the expansion in the manufacturing sector to continue through Q214 and H214, with the autos sector being amongst the fastest growing segments within manufacturing. Autos production, which accounts for 16.9% of manufacturing output, expanded by 12.6% y-o-y in Q114, and the recent expansion of plants by major automakers, combined with new plants being opened this year by new market entrants, points to robust production throughout the year.

Manufacturing Will Be A Main Engine Of Growth
Mexico - Industrial Production Index And Selected Sub-Components, % chg y-o-y

Public Investment Will Reduce Drag From Construction

We also expect the construction sector, which accounted for 7.4% of GDP last year, to recover in the coming quarters helped by a boost in public investment. The construction sector contracted by 4.5% last year, as a transition in government delayed major infrastructure projects, and a homebuilders' crisis that erupted in late 2012 weighed on residential construction activity. However, we believe that President Enrique Peña Nieto's USD594.0bn 2014-2018 National Infrastructure Plan will be a main driver of a recovery in the construction sector this year. The rate of contraction in the construction sector has become smaller in recent quarters, falling by 2.8% y-o-y in Q114, compared to the 4.6% y-o-y decline seen in Q413. Our Infrastructure team expects the construction sector to return to growth this year, forecasting a 4.0% expansion.

More Manufacturing And Construction Jobs Will Support Consumer Spending

An improvement in the manufacturing and construction sectors underpins our forecast for average unemployment to decline from 4.9% in 2013 to 4.2% in 2014, which will support stronger household spending levels this year. Indeed, the two sectors account for one in every three formal jobs in the country. While new taxes on several consumer goods that took effect on January 1 have weighed on private consumption and retail sales, a rebound in consumer confidence in March and April ( see chart below) that the impact of new taxes on spending patterns is fading. We expect consumer confidence to continue improving as unemployment declines, and forecast real private consumption growth to accelerate to 3.1% this year, compared to 2.5% in 2013.

Improving Consumer Confidence Points To Stronger Household Spending
Mexico - Consumer Confidence And Retail Sales

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Related sectors of this article: Economy, Economic Activity
Geography: Mexico
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