Mexico: Q2 economic growth showcases resilience in spite of external sector's subdued performance
September 22, 2017
Expenditure-based data for the second quarter released by Mexico’s national Statistical Institute (INEGI) on 22 September confirmed the economy’s resilient momentum in spite of a negative calendar effect in April related to the timing of the Easter holiday. According to INEGI, GDP rose 1.8% in the second quarter over the same period last year. The report also showed that aggregate supply and demand rose 2.6% year-on-year in Q2 (Q1: +4.0% year-on-year).
The domestic sector continued to send mixed signals in the second quarter. Household spending growth defied expectations of a slowdown in Q2; private consumption grew 3.4%, a better performance than Q1’s 3.0% increase and the best result in four years. Households likely benefited from record-high growth in remittances and a tight labor market, which had a greater impact than multi-year high inflation and rising interest rates. Conversely, persistent uncertainty regarding the future of NAFTA, upcoming general elections in Mexico in early 2018 and tighter credit conditions continued to stave off fixed investment, which declined 2.3% in Q2 (Q1: -0.1% yoy). Meanwhile, government consumption nearly stagnated in Q2, expanding only 0.1% (Q1: +1.0% yoy).
More discouraging was the external sector’s performance. Despite an upturn in global trade flows and upbeat dynamics in the U.S. manufacturing sector, export growth decelerated from Q1’s solid 9.1% expansion to a 4.6% increase in Q2. Imports growth also lost some steam (Q2: +5.0% yoy; Q1: +7.6% yoy), but the smaller deceleration meant a larger drag on overall growth. The sector’s net contribution to growth swung from plus 0.6 percentage points in the first quarter to minus 1.8 percentage points in the second quarter, marking the biggest subtraction to growth since Q3 2008.
The economy’s composition of growth is likely to change in the quarters to come. A contested election cycle next year is likely to keep private investment offshore, while Banxico’s tightened stance and multi-year high inflation are expected to weigh on private consumption in H2 despite strong remittance inflows and a supportive labor market. Conversely, the improvement in global trade flows is expected to boost demand for manufactured products from Mexico, which in turn should shore up activity in export-oriented services.
Author: David Ampudia, Economist