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Mexico's Growth Picks Up Slightly in Second Quarter August 12, 2019 Mexico’s gross domestic product (GDP) expanded 0.4 percent in the second quarter after contracting 0.7 percent in the first quarter. GDP grew 1.7 percent in 2018. Prior to the release of the latest GDP estimates, Mexico’s consensus growth forecast for 2019 had worsened from 1.3 percent in May to 1.1 percent in June.1 Other recent data are mixed. Retail sales grew, but exports and industrial production fell month over month, and employment growth remained below trend. The peso gained some ground against the dollar, while inflation declined. Economic Activity Up in Second Quarter Mexico GDP expanded at a 0.4 percent annualized rate in the second quarter, the third consecutive quarter of near-zero growth (Chart 1). Activity was flat in the goods-producing industries (manufacturing, construction, utilities and mining). Service-related activities (wholesale and retail trade, transportation and business services) grew 0.8 percent. Agricultural output contracted 13.6 percent. Chart 2 Exports Growing Despite Declines in Oil Index, January 2009 = 100* 250 200 Manufacturing Total 150 Other Oil 5.0% 6.1% 100 Exports Growth Weak Oil Total exports fell 3.8 percent in June after increasing 3.9 percent in May. Manufactured-goods exports decreased 3.0 percent in June after growing 3.7 percent in May. Three-month moving averages show continued increases in total and manufacturing exports but a decrease in oil exports (Chart 2). Despite the recent declines, total exports this year were up 2.4 percent through June compared with the same period in 2018, with manufacturing exports growing 3.7 percent and oil exports falling 11.3 percent. 50 Manufacturing 88.8% 0 2009 2010 2011 2012 2013 2014 2015 2016 2019 Index, January 2009 = 100* 135 Manufacturing IP 130 125 U.S. IP 115 Mexico’s industrial production (IP) index, which includes manufacturing, construction, oil and gas extraction, and utilities, decreased 2.1 percent in May after rising 1.4 percent in April. The drop in IP was mainly driven by construction, which contracted 6.3 percent—the largest monthly fall since February 2010. Oil and gas extraction fell 1.2 percent, and utilities dipped 0.6 percent. The manufacturing Federal Reserve Bank of Dallas 2018 Chart 3 Industrial Production Down in May 120 Industrial Production Falls in May 2017 *Seasonally adjusted, three-month moving average; real dollars. NOTES: All data are through June 2019. The pie chart reflects the share of total exports year to date in 2019 and may not sum to 100 due to rounding. SOURCE: Instituto Nacional de Estadística y Geografía (National Institute of Statistics and Geography). 110 Total IP 105 100 95 90 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 *Seasonally adjusted, three-month moving average. NOTES: Data for Mexico's manufacturing and total industrial production (IP) are through May 2019. Data for U.S. IP are through June 2019. SOURCES: Instituto Nacional de Estadística y Geografía (National Institute of Statistics and Geography); Federal Reserve Board. Mexico Economic Update 1 IP index fell 0.2 percent in May after increasing 0.5 percent in April. Chart 4 Retail Sales Continue to Grow Index, January 2009 = 100* 125 The three-month moving average for total production ticked down in May, although manufacturing IP has been improving since December 2018 (Chart 3). North of the border, U.S. IP remained flat in June after rising 0.4 percent in May. IP in Mexico and the U.S. are strongly correlated because of intra-industry trade that grew out of the 1994 North American Free Trade Agreement. 120 115 110 105 100 95 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 *Seasonally adjusted, three-month moving average; real pesos. NOTE: Data are through May 2019. SOURCE: Instituto Nacional de Estadística y Geografía (National Institute of Statistics and Geography). Retail sales expanded 0.7 percent in May after increasing 0.9 percent in April. The three-month moving average shows marked improvement (Chart 4). Since December 2018, the retail sales index has risen 3.9 percent. Chart 5 Employment Growth Slows in June Percent* 10 Retail Sales Increase in May 2009–18 annualized employment growth = 3.6% 8 6 June Job Growth Near Zero 4 2 0 -2 -4 -6 -8 -10 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 *Month/month, seasonally adjusted, annualized rate. SOURCE: Instituto Mexicano del Seguro Social (Mexican Social Security Institute). Chart 6 Peso Ticks Up in July Peso/dollar average 8 10 12 14 Formal sector employment—jobs with government benefits and pensions—grew an annualized 0.2 percent in June, well below the 10-year average of 3.6 percent (Chart 5). Formal sector employment growth has been below average for the past 10 months. In contrast, total employment, representing 54 million workers and including informal sector jobs, grew 2.4 percent in first quarter 2019, slightly above its 10-year average of 2.0 percent. Labor market tightness could be playing a role in restraining formal sector employment gains. The unemployment rate in May was 3.5 percent, the same as in April. Unemployment is slightly higher than the 2018 average of 3.3 percent but still very low. Peso Moves Up Relative to Dollar in July 16 18 19.1 20 22 24 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 NOTES: Axis is inverted. Data are through July 2019. SOURCE: Banco de México. Chart 7 Share of Foreign-Owned Government Debt Continues Downward Trend The Mexican currency averaged 19.1 pesos per dollar in July, up 1.2 percent from June (Chart 6). The peso has gained 5.6 percent against the dollar since December and is close to year-ago levels. The Mexican currency has been under pressure due to increased uncertainty regarding U.S. trade policy and Mexico’s domestic policy. Foreign-Owned Government Debt Dips Further Total government debt outstanding (percent)* 45 The share of peso-denominated Mexican government debt held abroad fell to 30.2 percent in June. The three-month moving average decreased to 30.7 percent and has been trending down since February 2017 (Chart 7). The extent of nonresident holdings of government debt is an indicator of Mexico’s exposure to international investors, whose holdings could quickly reverse if they perceive a change in market sentiment. 40 35 30 25 20 15 10 5 0 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 *Three-month moving average. NOTE: Data are through June 2019. SOURCE: Banco de México. Federal Reserve Bank of Dallas Mexico Economic Update 2 Inflation Continues to Decline Chart 8 Inflation Closer to Mexico's Central Bank's Long-Term Target 12-month percent change in CPI The consumer price index (CPI) increased 4.0 percent over the prior 12 months in June, down slightly from 4.3 percent in May (Chart 8). CPI core inflation (excluding food and energy) rose 3.9 percent over the previous 12 months in June. Mexico’s central bank maintained its benchmark interest rate at 8.25 percent in June. 8 7 6 5 4 3 —Jesus Cañas and Chloe Smith 2 Banco de México long-term inflation target = 3.0% 1 2009 2010 2011 2012 2013 2014 2015 2016 2017 NOTES: Data are through June 2019. CPI refers to the consumer price index. SOURCES: Banco de México; Instituto Nacional de Estadística y Geografía (National Institute of Statistics and Geography). 2018 2019 Note 1. Encuesta sobre las Expectativas de los Especialistas en Economía del Sector Privado: Junio de 2019 (communique on economic expectations, Banco de México, June 2019), http:// www.banxico.org.mx/publicaciones-y-prensa/ encuestas-sobre-las-expectativas-de-losespecialis/%7B747A0D4E-DCEF-1665-0694C69F86713C4B%7D.pdf. ………………………………………………………………………………… About the Authors Cañas is a senior business economist, and Smith is a research assistant in the Research Department at the Federal Reserve Bank of Dallas. Federal Reserve Bank of Dallas Mexico Economic Update 3
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