Mexico: Domestic demand shoulders GDP growth in Q1
Expenditure-based GDP data for the first quarter confirmed that the economy grew modestly against a backdrop of political uncertainty surrounding the run-up to the 1 July general election and the ongoing renegotiation of the North American Free Trade Agreement (NAFTA). According to the National Statistics Institute (INEGI), GDP climbed 1.3% year-on-year in Q1, decelerating slightly from 1.5% in Q4 last year. Meanwhile, aggregate supply and demand rose 2.4% annually in Q1, down from 3.0% in Q4 2017.
Domestic demand showed resilience in the first quarter, with dynamics improving across the board from a quarter earlier. Growth in household spending edged up to 2.6% on an annual basis in Q1 (Q4 2017: +2.5% year-on-year), supported by a tighter labor market and healthy remittance inflows. Meanwhile, government spending expanded for the first time in a year, growing 1.1% (Q4 2017: -0.2% yoy). Moreover, fixed investment also rebounded but remained tepid, expanding 1.5% (Q4 2017: -2.4% yoy) and likely held back by growing anxieties over the future of NAFTA and the outcome of July’s presidential vote.
The external sector, however, dragged on growth in the first quarter. Export growth eased to 1.6% annually in Q1 (Q4 2017: +2.4% yoy) despite robust global trade dynamics and healthy factory output in the United States at the outset of the year, as well as a weaker peso that boosted export competitiveness in the quarter. Import growth also decelerated, to 5.7%, in Q1 (Q4 2017: +7.3% yoy). Overall, the external sector subtracted 1.4 percentage points from headline growth in the first quarter, a slight improvement from the 1.7 percentage-point deduction in the fourth quarter last year.
All told, the economy began the year at a solid pace but faces significant challenges in the months ahead. Several downside risks are weighing on the outlook, including potential fallout from both the 1 July general election and the ongoing renegotiation of NAFTA—both of which are likely to continue weighing on the peso. Moreover, despite moderating since last year, inflation remains elevated and continues to weigh on households’ purchasing power.