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Mexico Outlook Deteriorates Despite Faster Growth in Fourth Quarter March 19, 2015 Mexico’s economy expanded 2.1 percent in 2014, according to official tallies, which measure annual average growth. Based on the four-quarter change, gross domestic product (GDP) growth came in at 2.6 percent last year, up from 1 percent in 2013. The data also suggest GDP grew at a faster rate in the fourth quarter than in the third. Despite this improvement, more recent indicators suggest slowing growth. While employment rose, industrial production, retail sales and exports fell. Inflation declined, while the peso continued depreciating against the dollar and reached levels not seen since the 2009 recession. Year-End Output Picks Up Annualized growth rate (percent) 10 5 0 -5 -10 -15 Mexico’s economy grew 2.7 percent in the fourth quarter, compared with a revised 2.1 percent rate in the third (Chart 1). Service-related activities (including trade, transportation and business services) advanced 3.5 percent, while goods-producing industries (including manufacturing, construction, utilities and mining) expanded 2.5 percent. Agricultural output fell 8.4 percent in the quarter. Despite the pickup in overall activity, the consensus forecast for 2015 GDP growth was revised down from 3.3 percent in January to 3.1 percent in February. Exports Drop in January -20 2007 2008 2009 2010 2011 2012 2013 2014 SOURCE: Instituto Nacional de Estadística y Geografía. Chart 2 Decline in Total Exports Driven by Falling Oil Shipments Index, January 2000 = 100* 350 300 Oil 250 Exports fell 3 percent in January after inching up 0.4 percent in December. Three-month moving averages reveal a steep, persistent decline in oil exports, while total exports show weakening since December (Chart 2). In 2014, total exports grew 3.1 percent, with manufacturing exports rising 5.6 percent. Oil exports fell 14.4 percent due to declines in oil production and, more recently, to lower oil prices. Mexico oil production is down about 33 percent since peaking at 3.5 million barrels per day in October 2004. Mexico crude oil prices have declined 59 percent since late summer. Industrial Production Stalls in January Mexico’s industrial production (IP) fell 0.4 percent month over month in January following a 0.3 percent decline in December. Three-month moving averages show stagnation in IP after it posted steady growth in 2014. The fall in total IP, which also includes construction, oil and gas extraction, and utilities, was broad based (Chart 3). Meanwhile, U.S. IP grew 0.1 percent in February after falling 0.4 percent in Federal Reserve Bank of Dallas Chart 1 Mexico's GDP Growth Improves in Fourth Quarter 2014 200 Total 150 100 Manufacturing 50 *Seasonally adjusted, three-month moving average; real dollars. SOURCE: Instituto Nacional de Estadística y Geografía. January. Mexico’s industrial production typically tracks U.S. IP, due in part to the U.S. automotive industry’s large presence in Mexico. Year-End Retail Sales Disappoint Retail sales fell 0.8 percent in December after growing 0.7 percent in November. The three-month moving average shows retail sales losing momentum toward the end of 2014 (Chart 4). The December-over-December measure was more positive, with retail sales up 2 percent, compared with 0.8 percent annual aver- Mexico Economic Update 1 age growth in the prior three years. Consumer confidence improved in February. Chart 3 Industrial Production Shows Signs of Cooling Index, January 2000 = 100* 130 Job Growth Remains Strong in 2015 125 Manufacturing IP 120 Formal sector employment—jobs with government benefits and pensions—grew at an annualized rate of 3.8 percent in February, compared with a robust 4.9 percent in January. Annual employment growth (December over December) was 4.3 percent in 2014, faster than 2013’s 2.9 percent (Chart 5). Total 115 110 105 U.S. IP Peso Continues Losing Ground 100 150 The peso fell 1.5 percent against the dollar in February, when the exchange rate averaged 14.9 pesos per dollar, up from 14.6 pesos in January (Chart 6). The peso has lost 11 percent against the dollar over the past year. The peso has been unstable as a result of the tapering of Federal Reserve asset purchases in the U.S. and the expected impact of falling oil prices on Mexico’s government finances. Oil revenues account for about one-third of the federal government budget. 140 Inflation Reaches Central Bank Target 95 90 *Seasonally adjusted, three-month moving average. SOURCES: Instituto Nacional de Estadística y Geografía; Federal Reserve Board. Chart 4 Retail Sales Edge Down Index, January 2000 = 100* Inflation ticked down to 3 percent in February after plummeting to 3.1 percent year over year in January (Chart 7). Prices excluding food and energy rose 2.4 percent, below the central bank’s long-term inflation target of 3 percent. Banco de México has kept policy rates on hold since June, when it lowered the reference rate by 50 basis points to 3 percent to help stimulate economic growth. Central bank policymakers believe that inflation expectations are well-anchored. However, policymakers have noted that they may raise interest rates if the peso’s weakness pushes up inflation. 130 120 110 100 90 *Seasonally adjusted, three-month moving average; real pesos. SOURCE: Instituto Nacional de Estadística y Geografía. Chart 5 Job Growth Continues into 2015 —Jesus Cañas Percent* 10 ………………………………………………………………………………………………… 5 About the Author 0 Cañas is a business economist in the Research Department at the Federal Reserve Bank of Dallas. -5 -10 -15 '07 '08 '09 '10 '11 '12 '13 '14 '15 *Month/month; seasonally adjusted, annualized rate. SOURCE: Instituto Mexicano del Seguro Social. Chart 6 Peso Depreciates to Levels Not Seen Since 2009 Recession Peso/dollar average Chart 7 Inflation Drops to Long-Term Target in February Year/year percent change 12 16 15 14 10 8 13 12 11 6 4 10 2 9 8 SOURCE: Banco de México. Federal Reserve Bank of Dallas Banco de México long-term target 0 SOURCE: Instituto Nacional de Estadística y Geografía. Mexico Economic Update 2