Mexico: Economy gains traction in Q1 on strong private consumption and exports growth
June 20, 2017
Expenditure-based data released by Mexico’s National Statistics Institute (INEGI) on 20 June confirmed the economy’s strong start to the year. According to INEGI, GDP rose 2.8% from the same quarter of the previous year in Q1, well above both market expectations of a milder 2.5% expansion and Q4’s 2.3% expansion. The report also showed that aggregate supply and demand rose 4.0% year-on-year in Q1 (Q4: +1.9% year-on-year).
The domestic side of the economy saw uneven performance across its components in Q1. Mexican households proved outstandingly resilient to several price shocks and a surge in political uncertainty following Donald Trump’s victory in the U.S. presidential election. Buttressed by a tighter labor market and soaring remittances, private consumption growth accelerated from a 2.9% expansion in Q4 to a 3.1% increase in Q1, the best reading since Q2 2013. However, uncertainty regarding U.S. trade and migration policy with its southern neighbor, coupled with important elections in several Mexican states and a tighter fiscal policy, caused fixed investment to stagnate in Q1 following a 1.1% expansion in Q4. Government consumption also decelerated from a 1.6% increase in Q4 to a 0.9% rise.
On a more encouraging note, meagre dynamics in the domestic sector were offset by a robust performance in the external side of the economy. Exports expanded a robust 9.1% in the first quarter of the year, a much faster clip than the 1.8% increase seen in Q4. Mexican exports benefited from a weak currency, robust demand from overseas and upbeat dynamics in the U.S. manufacturing sector. Imports also surged in the first quarter, accelerating from a 0.5% increase in the last quarter of 2016 to a 7.7% rise. As a result, the net contribution of the external sector to growth was unchanged for a second consecutive quarter at positive 0.5 percentage points.
Although the economy is off to a strong start, our panel expects growth momentum to lose steam in upcoming quarters. Private consumption growth will moderate as a result of sky-high inflation and Banxico’s ongoing tightening in financial conditions. Fixed investment, although likely to have bottomed out in Q1, will struggle to make any significant gains due to lingering political uncertainty linked to the renegotiation of NAFTA and still-subdued business sentiment. Exports, on the other hand, are expected to continue contributing strongly to growth on the back of a pick-up in global demand and despite the recovery of the peso against the U.S. dollar.
Author: David Ampudia, Economist