Mexico: Lukewarm investment and exports drag on GDP growth
December 22, 2016
Expenditure-based data released by Mexico’s National Statistics Institute (INEGI) showed that GDP increased 2.0% in the third quarter, decelerating from a 2.6% expansion in the second quarter. The print was widely expected. Looking at seasonally-adjusted quarter-on-quarter data, Mexico’s GDP deteriorated and contracted 0.2% in Q2 (Q1: +0.5% quarter-on-quarter), which represented the first decrease since Q2 2013.
On the domestic front, the main driver behind the deceleration was deteriorating gross fixed capital formation. Gross fixed investment decreased 0.7% in Q3 (Q2: +0.7% year-on-year), marking the first contraction in more than two years. Souring business confidence, tighter financial conditions, the sharp depreciation of the peso and low oil prices were the main drivers behind the drop. Conversely, private consumption continues to be the key engine of domestic demand growth, and thus of overall economic growth. Private consumption accelerated its pace of expansion in Q3, on the back of still good conditions in the labor market, healthy credit expansion, gains in real wage income and a high inflow of remittances. Meanwhile, government spending increased—surprisingly—for a second consecutive quarter in Q3, even as the government remains focused on fiscal consolidation.
On the external front, a disappointing performance of exports of goods and services also dragged on overall economic growth. Exports decreased for the second consecutive time in Q3, while imports increased tepidly in the same period. Consequently, in terms of contribution, net exports subtracted 0.1 percentage points from overall economic growth in Q3, on top of the 0.6 percentage-point detraction registered in Q2.
There is wide skepticism regarding Mexico’s prospects for its external sector, and consequently for the economy as a whole in 2017. Analysts and international observers remain concerned about possible fundamental changes to the North American Free Trade Agreement (NAFTA), given president-elect Donald Trump’s campaign pledge to renegotiate the agreement. While analysts remain divided on the magnitude of the shock that renegotiating NAFTA could have on Mexico’s economy, it is clear that the current uncertainty is having an impact on growth.
Author: Ricardo Aceves, Senior Economist