Economy To Regain Steam In The Coming Months

BMI View: We are downgrading our 2014 Mexican real GDP growth forecast from 3.5% to 3.3% amid signs that the economic recovery that began in mid-2013 lost momentum in Q413 and into Q114. That said, we still expect a significant uptick in economic activity compared to 2013, when real GDP growth came in at 1.1%, as the manufacturing sector regains steam and the construction sector continues its gradual recovery.

Real GDP growth in Mexico came in at 1.1% in 2013, below our 1.5% estimate, prompting us to downgrade our 2014 forecast to 3.3% from 3.5%. The main dynamics that drove slower than-expected growth in 2013 were a moderation in the pace of expansion of the manufacturing sector in Q413 and ongoing contractions in construction sector output. Both factors weighed down on Q413 real GDP growth, which came in at 0.7% year-on-year (y-o-y), compared to 1.4% y-o-y in Q313. High frequency economic activity data for early-Q114 also points to a weak beginning of the year, particularly regarding the manufacturing and consumer sectors. However, we expect Mexico's economic recovery to regain traction in the coming months as US external demand strengthens and household spending improves. In 2015, we forecast real GDP growth to accelerate to 3.7% as foreign investment into the energy sector begins to tick up following the passage of President Enrique Peña Nietos's recent energy sector liberalisation bill.

Manufacturing Sector Will Improve As Conditions In The US Normalise

Manufacturing Will Re-Accelerate This Year
Mexico - Real GDP Growth And Growth In Selected Sectors

BMI View: We are downgrading our 2014 Mexican real GDP growth forecast from 3.5% to 3.3% amid signs that the economic recovery that began in mid-2013 lost momentum in Q413 and into Q114. That said, we still expect a significant uptick in economic activity compared to 2013, when real GDP growth came in at 1.1%, as the manufacturing sector regains steam and the construction sector continues its gradual recovery.

Real GDP growth in Mexico came in at 1.1% in 2013, below our 1.5% estimate, prompting us to downgrade our 2014 forecast to 3.3% from 3.5%. The main dynamics that drove slower than-expected growth in 2013 were a moderation in the pace of expansion of the manufacturing sector in Q413 and ongoing contractions in construction sector output. Both factors weighed down on Q413 real GDP growth, which came in at 0.7% year-on-year (y-o-y), compared to 1.4% y-o-y in Q313. High frequency economic activity data for early-Q114 also points to a weak beginning of the year, particularly regarding the manufacturing and consumer sectors. However, we expect Mexico's economic recovery to regain traction in the coming months as US external demand strengthens and household spending improves. In 2015, we forecast real GDP growth to accelerate to 3.7% as foreign investment into the energy sector begins to tick up following the passage of President Enrique Peña Nietos's recent energy sector liberalisation bill.

Manufacturing Will Re-Accelerate This Year
Mexico - Real GDP Growth And Growth In Selected Sectors

Manufacturing Sector Will Improve As Conditions In The US Normalise

Real manufacturing production growth in Mexico slowed to 1.9% y-o-y in Q413 from 2.9% y-o-y in Q313, after weak weather in the US disrupted demand for the country's manufactured goods, following d. The manufacturing sector of both countries are closely linked, given that Mexico supplies a significant amount of intermediate manufactured goods to the US, especially in the autos segment. As such, a sharp drop in the US Purchasing Managers Index to 51.3 in January from 56.5 in December of last year, points to a poor 2014 start for Mexico's manufacturing sector. Indeed, Mexico's IMEF Manufacturing Confidence Index fell to 49.2 in January from 49.8 in December, and remaining below the 50.0 benchmark that suggests contractionary conditions in the sector. In addition, new orders fell in January, pointing to weak production in February. That said, we believe the recent poor performance in manufacturing is mostly weather-related and expect the sector to improve significantly in the coming months as US consumer demand continues to strengthen.

Weather Temporarily Weighing On Manufacturing
Manufacturing Confidence Indices Of The US And Mexico

Construction To Sustain Its Gradual Recovery

One of the main drags on the Mexican economy has been the construction sector, which has remained in a recession since the homebuilders' crisis that began in late 2012. However, we expect the sector to recover in the coming quarters, driven by stronger fiscal support and increasingly greater private sector investment, especially in non-residential infrastructure. Indeed, President Enrique Peña Nieto's US$315bn National Infrastructure Plan will finance new projects in the coming months, and the government recently allocated additional funds in its 2014 budget to compensate for some of the delays in public spending that were seen last year. Moreover, we expect investment to increase gradually in the coming months into oil-related infrastructure, following the recent liberalisation of the energy sector.

Construction Sector's Negative Contribution To Growth Will Slowly Fade
Mexico - Industrial Production

Consumers To Adjust To Recent Tax Hikes In The Coming Months

We believe household spending will remain relatively weak in the first months of 2014, but we expect it to strengthen in Q214 and into H214. Indeed, tax hikes on certain consumer goods that took effect on January 1, including a new MXN1.0 tax per litre of sugary drink and an increase in the tax on junk food from 5.0% to 8.0%, will weigh on private consumption in Q114. Mexico's Consumer Confidence index fell sharply in January, coming in at 84.5, compared to an average of 94.5 in 2013. However, we expect consumer confidence to improve as households adapt to the new taxes, and labour dynamics improve as manufacturing and construction activity picks up. We forecast unemployment to decrease from 4.3% in 2013 to 4.1% by end-2014 and real private consumption to accelerate from 2.6% in 2013 to 3.3% in 2014.

Household Spending Will Improve As Consumers Adapt To New Taxes
Mexico - Consumer Confidence Index And Retail Sales Growth

Risks To Outlook

Risks to our growth outlook lie mostly to the downside. Weak February and March data on the consumer, manufacturing and construction sectors could suggest that the recent deterioration in the economy could extend into Q213, and would prompt us to revisit our growth assumptions. In addition, more poor weather in the US would continue to create headwinds to the Mexican economy, and result in weaker economic activity than we currently forecast. Furthermore, at the time of writing we are still waiting for full year GDP by expenditure data to be published (only sector breakdown is available), which means that we could adjust the forecast of specific expenditure components slightly towards either direction once the data is available.

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