Supply Side Results Shed Light on Mexican Economy in 2016

As reported earlier this year, the Mexican economy grew 2.3 percent in 2016. Growth in the last quarter was 2.4 percent, year over year. The industrial sector was very weak in 2016, falling 0.4 percent.

Strong Domestic Economy Trumps Weak External Sector

The Mexican economy grew 2.3 percent during 2016, compared to a growth rate of 2.6 percent in 2015. The slowdown in economic growth was due to a very weak industrial sector, which contracted 0.4 percent during the year. However, the agricultural sector’s performance was very strong, up 4.1 percent (versus 1.5 percent in 2015). The service sector was also relatively strong, up 3.2 percent during the year compared to a 3.5 percent rate during 2015.

This means that the domestic economy was strong compared to the external sector in 2016, and perhaps, this is one of our biggest concerns during 2017 as the strong depreciation of the currency has already made inroads in the rate of inflation and the costs of imported goods are going to bite into personal consumption expenditures during this year. The external sector should have been one of the strongest sectors in 2016 due to the large depreciation of the currency. Meanwhile, domestic demand should have slowed down due to higher inflation and the higher cost of imported goods.

However, there has not been any indication that the manufacturing sector has benefited from the depreciation of the peso, and, perhaps, that is a sign of things to come for this year. Manufacturing production was up only 1.3 percent during 2016 compared to 2.5 percent during the previous year. Meanwhile, construction activity rose 1.8 percent versus 2.7 percent in 2015. This sector of economic activity is expected to have weakened considerably this year as higher interest rates take a bite out of activity in the real estate market.

Even commerce output grew at a much slower rate in 2016 (up 2.4 percent) versus the 4.7 percent growth rate recorded in 2015. This slowdown will likely have implications for personal consumption expenditures (PCE) in 2016. Demand results will not be released for another month, but commerce results are pointing to a strong slowdown in PCE during 2016, which is intuitively correct due to the effects of the depreciation of the currency and the strong acceleration in inflation.

Still Expecting a Mild Recession in 2017

We are still expecting the Mexican economy to record a mild recession during this year as we expect peso depreciation and higher inflation to continue to bite into consumer demand. Meanwhile, we still see no reaction from the manufacturing sector to the large depreciation of the currency, so any benefits from this improvement in competitiveness is still not showing in economic activity. Thus, last year’s slowdown is expected to continue during this year.