Mexican Economy Improves in Q3, But Doubt Persists

The Mexican economy grew 2.2 percent year-over year in Q3, improving upon the second quarter’s 1.6 percent pace. Compared to Q2 the economy grew 0.5 percent, which was a bit weaker than expected.

Still No Signs of the Strong Recovery Markets Were Expecting

The Mexican economy has continued to disappoint after the historic structural reforms passed by the Peña Nieto administration during the past two years. The results for the third quarter were better than in previous quarters, but still below expectations. Still, the 2.2 percent in Q3 was the strongest year-over-year performance since the Q4-2012. Demand GDP components will not be ready for another month or so but we can gauge some of these sectors by looking at the supply side of the economy.

One of the most important developments during the third quarter is the recovery in the construction sector, a sector crushed during the last two years. That sector posted a strong 4.0 percent year-over-year growth rate in the third quarter. This was the first positive reading for this sector since the Q4-2012. Manufacturing was relatively strong, posting a year-over-year growth rate of 3.2 percent, while consumer demand was also stronger given the strengthening of the commerce sector. Commerce was up 3.9 percent after being up only 1.8 percent in the second quarter. This was the highest year-over-year growth rate since the third quarter of 2013. One of the weakest components of the industrial sector was mining activity, whose production declined once again, this time by 2.1 percent compared to the same quarter a year earlier. This was the fifth year-over-year decline in mining in the last six quarters as well as the largest year-over-year decline since a 4.6 percent drop during in Q4-2009. Another negative for growth was the performance of the Mexican transportation sector, whose growth slowed down considerably, to 1.1 percent in Q3 compared to a 1.7 percent rate in Q2. Although the growth of this sector was positive, the performance was the weakest performance of this sector since the third quarter of 2009.

Still No Clear Perspective for Next Year

Almost every analyst last year argued that this year’s growth was going to be better because the Peña Nieto administration, busy with the reform process in 2013, had forgotten to spend money. Real government consumption in 2013 inched up only 1.2 percent versus 2.8 percent in 2012. The argument was that this year’s GDP boost was going to come from higher government expenditures. However, if that was the case for 2014, what would happen in 2015 if petroleum prices remain at current levels? If petroleum prices remain at current levels government consumption growth next year will probably be constrained, exerting downward pressure on GDP growth for 2015. Still, the private sector will continue to improve and we will see growth next year. However, our guess is that analysts will probably start to dial down GDP growth estimates for Mexico next year.