Mexico: In Q4, exports record a notable performance while private consumption growth slows
March 21, 2017
With production-based data already in hand, on 21 March Mexico’s National Statistics Institute (INEGI) released a breakdown of GDP by expenditure. The data showed that aggregate supply and demand increased 1.9% year-on-year in Q4 (Q3: +1.6% year-on-year), which fell short of the 2.2% increase the markets had foreseen. According to INEGI, GDP increased 2.4% year-on-year in Q4 (Q3: +2.1% year-on-year) and imports grew just 0.5% (Q3: +0.3% yoy).
But the most relevant piece of information was the demand-side composition of economic growth. Private consumption growth remained solid last year, despite decelerating slightly in the final quarter of 2016 (Q4: +2.8% yoy; Q3: +3.0% yoy). However, at the outset of this year real wages are starting to take a hit from high inflation, reducing households’ purchasing power and denting private consumption. Inflation has risen as a result of the sharp depreciation of the peso and an increase in gasoline prices. Consequently, it remains to be seen whether other expenditure components of GDP will pick up the slack. In the wake of a decline in oil-related tax revenue, the Mexican government had to embark on more prudent fiscal policy last year, resulting in subdued government spending growth throughout 2016. In Q4, government spending rose 1.6%, matching the figure observed in the prior quarter. Investment eked out a 1.0% year-on-year increase in Q4, contrasting Q3’s 0.7% contraction. Over last year as a whole, investment grew by a mere 0.4%. Since the U.S. elections in November, uncertainty regarding Mexico’s future relationship with the U.S. has been weighing on business confidence, which is translating into weaker investment growth as businesses cut capital expenditure (CAPEX) plans this year.
The external sector showed encouraging signs in the final quarter of last year. Exports increased 2.0% year-on-year in Q4 (Q3: +1.0% yoy), with net exports providing a meaningful contribution to overall GDP growth (+0.6 percentage points). The external sector benefited from favorable tailwinds in the form of the sharp depreciation of the peso and an acceleration in U.S. manufacturing production and trade. In the absence of any meaningful disruption in trade relations between Mexico and the U.S, exports are expected to continue to grow going forward.
Author: Ricardo Aceves, Senior Economist