Growth Will Accelerate As Manufacturing And Public Investment Improve

BMI View: We expect Mexico's economic recovery to grain traction in the coming months, following erratic economic activity in Q413 and Q114. We believe that accelerating manufactured goods exports growth and stronger household spending levels will be the main drivers of faster real GDP expansion. In addition, a recovery in public investment, following significant delays in 2013, will also contribute to stronger growth in 2014 and 2015.

Macro Strategy

We forecast real GDP growth in Mexico to accelerate from 1.1% in 2013 to 3.3% in 2014 and 3.7% in 2015. Following ongoing contractions in the construction sector and a slump in manufactured goods exports growth in late 2013 and early 2014 due to weather-related disruptions to production, we expect economic activity to re-accelerate in the coming months. Indeed, stronger public investment into infrastructure, after a government transition last year resulted in spending delays, will ensure the construction sector recovers from the contraction it experienced in 2013. Moreover, ongoing signs of stronger US consumption bodes well for Mexico's manufacturing sector, and we expect manufactured goods, especially those related to the autos segment, to pick up in the coming quarters. An improvement in construction and manufacturing will bolster labour dynamics, which underpin our expectations for private consumption growth to accelerate both in 2014 and 2015.

Economic Activity Will Pick Up In The Coming Quarters
Mexico - Real GDP Growth

BMI View: We expect Mexico's economic recovery to grain traction in the coming months, following erratic economic activity in Q413 and Q114. We believe that accelerating manufactured goods exports growth and stronger household spending levels will be the main drivers of faster real GDP expansion. In addition, a recovery in public investment, following significant delays in 2013, will also contribute to stronger growth in 2014 and 2015.

Macro Strategy

We forecast real GDP growth in Mexico to accelerate from 1.1% in 2013 to 3.3% in 2014 and 3.7% in 2015. Following ongoing contractions in the construction sector and a slump in manufactured goods exports growth in late 2013 and early 2014 due to weather-related disruptions to production, we expect economic activity to re-accelerate in the coming months. Indeed, stronger public investment into infrastructure, after a government transition last year resulted in spending delays, will ensure the construction sector recovers from the contraction it experienced in 2013. Moreover, ongoing signs of stronger US consumption bodes well for Mexico's manufacturing sector, and we expect manufactured goods, especially those related to the autos segment, to pick up in the coming quarters. An improvement in construction and manufacturing will bolster labour dynamics, which underpin our expectations for private consumption growth to accelerate both in 2014 and 2015.

Economic Activity Will Pick Up In The Coming Quarters
Mexico - Real GDP Growth

Expenditure Breakdown

Private Consumption: We forecast real private consumption growth to accelerate from 2.5% in 2013 to 3.1% in 2014 and 3.7% in 2015. We believe that the main driver of stronger household spending will be a decline in unemployment, which we forecast to average 4.2% in 2014 and 4.1% in 2015, down from 4.9% in 2013. The main contributor of labour market improvements will be the manufacturing sector, which in recent years has generated one of every four new jobs. While consumer confidence reached its lowest levels since 2010 in January and February of this year amid new taxes on several consumer goods that took effect on January 1, we expect confidence to pick up in the coming months as households adapt to the new tax regime.

Confidence Will Improve As Households Adapt To New Taxes
Mexico - Consumer Confidence And Retail Sales Growth

Government Consumption: We forecast real government consumption growth to increase from 1.1% in 2013 to 2.7% in 2014 and 2.5% in 2015. In response to the spending delay seen throughout 2013, President Enrique Peña Nieto has increased expenditure allowances and put a spending acceleration programme in place. Public spending grew by 19.9% year-on-year (y-o-y) in January, a positive sign that recent measures implemented to address delays are working. We expect government spending to increase in the coming months as well as through most of next year, when mid-term elections will take place.

Gross Fixed Capital Formation: After contracting by 1.8% in 2013, we forecast real gross fixed capital investment to grow by 2.6% in 2014 and 4.0% in 2015. Indeed, the spending delays seen last year also had a negative impact in public investment, which contracted by 4.7% in 2013 and caused private investment to contract by 1.0%. However, the government has committed significant investment, into infrastructure in particular, through its US$315bn National Infrastructure Plan, which we expect will also attract private investment into the sector. In addition, energy sector reform will also attract significant investment into the oil & gas sector, although much of the large investments into the sector will not likely come until 2015.

Fixed Investment To Recover As Spending Delays Are Addressed
Mexico - Gross Fixed Capital Investment

Net Exports: We expect goods and services exports to improve in the coming quarters, forecasting real growth of 4.0% in 2014 and 5.5% in 2015, up from 1.4% in 2013. The main driver of an acceleration in export growth will be greater US demand for Mexican manufactured goods, which account for over 80.0% of total goods exports in the country. On the other side of the trade account, we also expect imports of goods and services to pick up, forecasting real growth of 3.9% in 2014 and 5.2% in 2015, up from 1.2% last year. Indeed, an overall improvement in household spending, combined with a gradual appreciation of the peso, will contribute to faster import growth.

An Improvement In Manufacturing Will Drive An Uptick In Exports Growth
Mexico - Total Goods Exports And Manufacturing Exports, % chg y-o-y

Risks To Outlook

There are two main downside risks to our growth outlook. First, the tax hikes on consumer goods could have a longer and greater drag on household spending than we anticipate, which would result in lower real private consumption growth than we currently forecast. Second, a significant delay in the passing of secondary legislation for energy sector reform, or a bill that does not meet investor expectations, could lead to a rapid deterioration in market sentiment towards Mexico. Under such a scenario, private fixed capital investment could see another year of poor growth, which would have a significant negative impact on headline growth.

MEXICO - GDP BY EXPENDITURE, REAL GROWTH %
2010 2011 2012 2013 2014f 2015f 2016f 2017f 2018f
Real GDP growth, % y-o-y 1,2 5.1 4.0 3.9 1.1 3.3 3.7 3.8 3.9 4.0
Private final consumption, real growth % y-o-y 1,2 5.3 4.9 4.7 2.5 3.1 3.7 3.8 3.9 3.9
Government final consumption, real growth % y-o-y 1,2 1.7 2.5 3.3 1.1 2.7 2.5 1.5 1.5 1.8
Fixed capital formation, real growth % y-o-y 1,2 1.3 7.9 4.6 -1.8 2.6 4.0 4.4 4.8 5.1
Exports of goods and services, real growth % y-o-y 1,2 20.5 8.2 5.9 1.4 4.0 5.5 5.5 6.1 6.4
Imports of goods and services, real growth % y-o-y 1,2 20.5 8.0 5.4 1.2 3.9 5.2 5.1 5.9 6.3
Net exports of goods and services, real growth % y-o-y 1,2 12.2 -12.9 -64.8 -72.4 -24.6 -513.7 217.1 40.2 25.5
Notes: f BMI forecasts. 1 Base year=2003. Sources: 2 INEGI/IBMI calculation.

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