Disappointing Mexican Growth in August

Mexican economic growth decelerated once again in August. The index of economic activity dropped 0.2 percent month-over-month, while increasing 1.3 percent on a year-earlier basis.

Service Sector Weakened Considerably in August

One of the biggest culprits for the deceleration in growth in August was a
slowdown in the service sector, which dropped 0.2 percent compared to July and grew only 1.0 percent compared to the same month in 2013. This is bad news for 2014 economic growth prospects as the weakness in the service sector points to weak domestic demand which had started to gain some momentum during the second quarter of the year. The current environment points to a softening in domestic demand that will make it difficult for the country to achieve our modest 2.0 percent growth forecast, let alone higher forecasts from the Mexican government and consensus expectations.

The weakness was not only concentrated in the service sector as the primary sector, i.e., agriculture and cattle, declined 0.4 percent in the month. However, not all was bad news regarding the primary sector as it surged 7.6 percent versus a year earlier. The biggest problems with this sector are that it is a relatively small economic sector and at the same time growth is extremely volatile from month to month and quarter to quarter. Issues with this year’s economic performance have to do with the shape of the secondary sector, which includes manufacturing and construction.

Manufacturing and Construction Will be Key

This year’s growth prospects will depend on the secondary sector. The construction sector has been recovering slowly from the severe crisis that started at the end of 2012 as the new president took over. Although the sector is coming back it is still very weak considering the severe crisis it suffered during the past two years.

The manufacturing sector, on the other hand, is driving the wave of the strong U.S. demand for automobiles. Thus, we expect that sector to remain relatively strong. However, the number for August does not portend to strong manufacturing as the secondary sector posted a growth rate of just 0.4 percent month-over-month and by only 1.4 percent year-over-year, which is not much considering the strength of U.S. auto demand.

The Mexican economy has grown about 1.5 percent on a year-over-year basis to August of this year and will need a large boost in growth during the remaining four months of the year in order to achieve our conservative growth rate of 2.0 percent. Thus, today’s release will probably send the Mexican government and analysts back to the drawing board to dial down GDP growth for the year. Furthermore, the recent drop in oil probably tie the hands of fiscal policy for the rest of the year.