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Mexico Economy Improves in Second Quarter September 22, 2014 Mexico’s economy expanded at a much faster rate in the second quarter than in the first. Recent data point to continued growth, with industrial production, employment, exports and retail sales all growing in July and August. Inflation ticked up, and the peso lost ground against the dollar in August. Chart 1 Gross Domestic Product Growth Improves in Second Quarter Annualized growth rate (percent) 10 5 0 Output Posts Solid Growth Mexico’s economy grew 4.2 percent in the second quarter, compared with a revised 1.8 percent rate in the first (Chart 1). Service-related activities (including trade, transportation and business services) grew 4.3 percent, while goods-producing industries (including manufacturing, construction, utilities and mining) grew 4.1 percent. Agricultural output expanded 3.7 percent in the quarter. Despite the pickup in overall activity, the consensus forecast for gross domestic product growth in 2014 was revised down from 2.6 percent in July to 2.5 percent in August. -5 -10 -15 -20 2007 2011 2012 2013 2014 350 300 Exports grew 1.5 percent in July after coming in flat in June. Three-month moving averages reveal a continued steep decline in oil exports, while total exports have been expanding since the beginning of the year (Chart 2). Year to date, total exports have grown 2.9 percent, with manufacturing exports up 4.6 percent. Oil exports declined 10.1 percent during the first seven months of 2014. 200 Federal Reserve Bank of Dallas 2010 Index, January 2000 = 100* 250 Mexico’s industrial production (IP) grew 0.3 percent month over month in July after slipping 0.2 percent in June. Three-month moving averages show a broad pickup in total IP, which also includes construction, oil and gas extraction, and utilities. Manufacturing IP continued to increase faster than total production (Chart 3), and construction IP (not shown) is growing again. Meanwhile, U.S. IP fell 0.1 percent in August 2009 Chart 2 Total Exports Growing as Oil Exports Continue Falling Exports Rise Despite Decline in Oil Trade Industrial Production Showing Improvement 2008 SOURCE: Instituto Nacional de Estadística y Geografía. Oil Total 150 100 Manufacturing 50 *Seasonally adjusted, three-month moving average; real dollars. SOURCE: Instituto Nacional de Estadística y Geografía. after rising 0.2 percent in July. Mexico’s industrial production typically tracks U.S. industrial production, due in part to the U.S. automotive industry’s large presence in Mexico. Retail Sales Tick Up Retail sales rose 0.2 percent in June after posting flat growth in May. The three-month moving average, which was essentially flat for all of 2013, has shown some im- Mexico Economic Update 1 Chart 3 Industrial Production Rises as Manufacturing Takes Off Index, January 2000 = 100* 130 125 Manufacturing IP 120 provement since March (Chart 4). Year over year, retail sales are up 1.4 percent. Consumer confidence worsened in August for the second consecutive month. Job Growth Slows in August Total 115 110 105 U.S. IP 100 95 90 Formal sector employment—jobs with government benefits and pensions—grew at an annualized rate of 3.1 percent in August, faster than the annual rate of 2.9 percent in 2013 but slower than the 4 percent average so far in 2014 (Chart 5). Formal sector employment grew 4.6 percent in 2012. Peso Depreciates Slightly *Seasonally adjusted, three-month moving average. SOURCES: Instituto Nacional de Estadística y Geografía; Federal Reserve Board. The peso fell 1.1 percent against the dollar in August as the exchange rate declined from 13 pesos per dollar in July to 13.1 in August (Chart 6). Since December, the peso has been stable—losing only about 1 Chart 4 Retail Sales Showing Some Improvement Chart 6 Dollar Is Up Versus Peso in August Index, January 2000 = 100* Peso/dollar average 16 150 15 140 14 130 13 120 12 11 110 10 100 9 90 8 *Seasonally adjusted, three-month moving average; real pesos. SOURCE: Instituto Nacional de Estadística y Geografía. SOURCE: Banco de México. Chart 7 Inflation Picks Up in August for Third Consecutive Month Chart 5 Job Growth Slows After the First Half of 2014 Year/year percent change 12 Percent* 10 10 5 8 0 6 -5 4 -10 2 -15 2007 2008 2009 2010 *Month/month; seasonally adjusted, annualized rate. SOURCE: Instituto Mexicano del Seguro Social. Federal Reserve Bank of Dallas 2011 2012 2013 2014 Long-term target 0 SOURCE: Instituto Nacional de Estadística y Geografía. Mexico Economic Update 2 percent against the U.S. dollar—even as Federal Reserve tapering has adversely affected the currencies of other emerging economies. Inflation Picks Up Again in August Inflation increased to 4.1 percent year over year in August (Chart 7). Prices excluding food and energy rose 3.4 percent, which is slightly above the central bank’s long-term inflation target of 3 percent. Monetary policy has been on hold since Banco de México lowered the reference rate in June by 50 basis points to 3 percent to help stimulate economic growth. Policymakers continue to believe that inflation expectations are well-anchored. —Jesus Cañas ……………………………………………………………………………………... About the Author Cañas is a business economist in the Research Department at the Federal Reserve Bank of Dallas. Federal Reserve Bank of Dallas Mexico Economic Update 3