Mexico’s Economic Growth Revised Lower From Early Estimate

Mexico’s economy grew at a slightly slower pace than the preliminary estimate in the second quarter, even as the country benefited from the strength of its trade with the US and its own robust consumption.

(Bloomberg) — Mexico’s economy grew at a slightly slower pace than the preliminary estimate in the second quarter, even as the country benefited from the strength of its trade with the US and its own robust consumption.

Gross domestic product expanded 0.8% from the previous three months, below the 1% median estimate by economists in a Bloomberg survey and the 0.9% preliminary reading reported last month. From the same period a year ago, GDP grew 3.6%, less than the preliminary 3.7% print, according to final data released by Mexico’s national statistics institute Tuesday.

The US has been feeding Mexico “via remittances, tourism, and imports, mainly of cars and SUVs,” said Gabriel Casillas, Barclays Plc’s chief Latin America economist. “Manufacturing companies have been relocating several lines of production from Asia and Eastern Europe to Mexico, mainly because of geopolitical tension.”

The slight downward revision is explained in part by the statistics agency’s change in the base year for comparisons. That modification contributed to the services sector’s downward revision to 0.7%, from 1% before, and the agricultural sector’s revision to 0.7%, from 0.8%. The industrial sector was revised upward to 1.2% compared to the prior three-month period. 

Positive Outlook

Nevertheless, general optimism about Mexico’s economic outlook remains intact. Analysts in a Citi survey published last week said that they expect GDP to expand 2.9% this year, up from a forecast of 2% in early June. Economists in a Bloomberg survey in August see Mexico’s growth at the end of the year at 3%.

What Bloomberg Economics Says

“Monthly data for June and revised second-quarter GDP numbers show strong activity and domestic demand in Mexico. Below-consensus prints should moderate expectations, but still support a positive growth outlook. Data came in above central bank forecasts and signaled above-potential growth and little economic slack. That reduces the probability of interest-rate cuts this year. Government policies and tight monetary conditions are holding back growth, and a potential recession in the US is the main risk.”

— Felipe Hernandez, Latin America economist

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High employment and wage growth have put more money in circulation. Latin America’s second-largest economy has also been helped by US demand for its exports, with the country posting a trade surplus in June amid a fall in the value of oil imports. The recovery of the services sector from its pandemic slump has also been a boon.

“Consumption has reached records because of the growth of total real wages, the government’s transfers to people, and the expectation that those transfers will continue to increase next year,” said Gabriela Siller, economist at Grupo Financiero Base, citing handouts to groups such as the elderly and youth.

Summer spending on vacations and restaurants has also been a key element behind consumer price increases in recent months. Headline inflation stood at 4.67% in early August in the government’s most recent measurement. That’s down from the cycle peak of 8.77% recorded a year prior, though well above the central bank’s target of 3%, plus or minus one percentage point.

“Despite the revision to the downside, growth remains quite strong in Mexico,” said Carlos Capistran, the head of Mexico and Canada economics at Bank of America. “There are three main reasons: the US has also surprised to the upside in a big way, nearshoring and public construction.”

Aside from increasing government handouts, President Andres Manuel Lopez Obrador has sought to finish projects including a train through Mexico’s southeast and a major refinery before the end of his term in 2024, explaining part of the boost in construction in recent months. The unofficial presidential candidate for his party is expected to be announced Sept. 6.

The investment of companies in Mexico to continue to sell to North American markets, the process known as nearshoring, has also supported expectations for sustained growth. Infrastructure problems and the tight labor market are concerns for some, and other countries have made competing offers, which has meant not all firms considering Mexico will finalize their deals.

Even so, the country received $29 billion in foreign direct investment in the first half of 2023, with much of that money coming from the US. The US is the No. 1 buyer of Mexico’s goods.

–With assistance from Rafael Gayol.

(Update with domestic consumption in lead and economists’ analysis starting in third paragraph)

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