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News | Question of the Week, WC 14th January
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Question of the Week, WC 14th January

Q: Mexico's GDP growth slowed slightly in Q4; can it improve this year?

A: The IGAE activity index—a monthly proxy for GDP—appeared to suggest that Mexico’s economy slowed in Q4, under the weight of many domestic and external threats. The index rose a relatively modest 2.1% year-over-year in October, after a 2.6% increase on average during the third quarter, though the underlying trend remains relatively stable. The services sector has been the main driver of the cycle, helped by the lagged effect of improving fundamentals throughout the year. But the industrial sector is still hindering the recovery. The trend has deteriorated again, due mainly to plunging activity in the mining/oil sector. Manufacturing remains the stronger element of the industrial sector, but output weakened slightly at the start of Q4.

Overall, recent data should ease fears of a severe downturn, and support our view that the economy will continue to grow, though at a very modest pace. The manufacturing sector likely will benefit from a marginal recovery in external demand, supported by decent first half growth in the U.S. But risks are tilted to the downside. China’s economy is slowing, partly as a consequence of the trade war, directly hurting the U.S. manufacturing sector, Mexico's biggest trading partner, by far. The pain is set to intensify for Mexico's manufacturing if the U.S. economy fails to gather momentum.

The positive side here is that the pain inflicted on both the Chinese and U.S. economies means that their governments are highly motivated to achieve an agreement over the coming months. We think the trade war will be over by the spring, but risks remain. In the meantime, the Chinese government is trying to offset the negative effect of tariffs by implementing monetary and fiscal measures to reactivate its economy. In due course this will have a positive effect on the global economy, especially EM, helping to alleviate the tensions caused by the trade war.  Still, mining and construction output likely will remain under strain, hampered by relatively low oil prices and the change of administration. Construction activity likely will gather strength over the second half of the year.

On the demand front, meanwhile, private consumption likely will remain resilient, but we expect investment to slow, at the margin, over the next three-to-six months on the back of tight monetary policy, high inflation and low business confidence. Political uncertainty, driven by AMLO’s recent policies, and lingering uncertainties about the USMCA agreement, is to blame for the latter. These forces likely will be partially offset by the strength of the labour market, healthy remittances from the U.S. and the relatively solid credit market. Overall, we expect the Mexican economy grow 1.9% year-over-year in 2019, slightly down from 2.0% in 2018. But risks are tilted to the downside, at least for now.

Andres Abadia, Chief Latam Economist

Pantheon Macroeconomics

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Posted: 18th Jan 2019

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