Mexico: Growth disappoints in Q2 amid election-year challenges
July 31, 2018
A preliminary estimate for economic activity in the second quarter confirmed the challenges facing the economy in the run-up to the 1 July general election, with growth in the quarter coming up short against market expectations. At face value, the 2.7% unadjusted year-on-year expansion in the second quarter was considerably stronger than the 1.3% reading at the outset of the year. However, it still landed shy of the 2.9% print expected by analysts. On a year-on-year level, growth was reported across the board. A more complete picture of the economy came, however, from the seasonally-adjusted quarter-on-quarter figures, which showed a marginal contraction from the first quarter (Q2: -0.1% quarter-on-quarter s.a.; Q1: +1.1% qoq s.a.) as the agricultural and industrial sectors posted losses. Analysts had expected a modest 0.2% quarter-on-quarter gain in the second quarter.
Unadjusted annual figures showed the services sector growing at a strong pace (Q2: +3.4% year-on-year; Q1: +2.0% yoy) despite upside inflation risks in the quarter, a trend now seen for several quarters. Solid wage growth and the continued expansion of credit to the private sector almost certainly fueled the robust expansion, which had to contend with cooling consumer sentiment amid growing political uncertainty and the peso’s rollercoaster ride—and its effect on inflation—in the run-up to election day. Meanwhile, the industrial sector rebounded on an annual basis, expanding for the first time in more than a year (Q2: +1.4% yoy; Q1: -0.8% yoy), largely as a result of more working days in the second quarter compared to last year. On the other hand, the agricultural sector posted more moderate growth in the second quarter (Q2: +1.8% yoy; Q1: +5.4% yoy).
On a quarter-on-quarter basis, the economy was hampered by contractions in the agricultural (Q2: -2.1% qoq s.a.) and industrial (Q2: -0.3% qoq s.a.) sectors. That said, shrinking industrial output more accurately reflected an impressive first quarter rather than a weak second quarter. A breakdown is expected to show that construction activity slowed in the quarter, while the continued strength of manufacturing metrics through June suggest that firms made good use of the weaker peso. Moreover, ongoing trade disputes with the United States do not appear to have weighed too heavily on industry’s quarter-on-quarter figures, but NAFTA renegotiations, as well as the U.S.’s imposition of tariffs, remain reasons for concern. Meanwhile, solid gains in the services sector (Q2: +0.3% qoq s.a.) were able to offset most of these losses, lifted by a strong labor market and resilient external demand—despite the noise surrounding the general election.
Overall, despite posting soft figures, the economy coped well with the extenuating circumstances of an election year—and all its baggage, including political uncertainty and currency volatility—on top of the ongoing doubt surrounding the update to the country’s mainstay trade pact. Moreover, economic prospects for the second half of the year are brighter with election day in the rearview mirror; the peso has recovered most of its mid-year losses amid improving prospects for a deal on NAFTA and in the aftermath of Andrés Manuel López Obrador’s win on 1 July. Moreover, consumer confidence should improve considerably over the coming months as political uncertainty increasingly fades ahead of AMLO’s 1 December inauguration and as inflation continues ticking downward again. That said, NAFTA could still implode and AMLO’s fiscal priorities may yet throw off foreign investment—both unknowns will continue to weigh on the outlook going forward.
Author: Christopher Thomas, Economist