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05 Jun 2014

Mexico’s recovery delayed

Andre Loes

by Andre Loes

Chief Economist for Latin America, HSBC

Mexico’s recovery delayed

Consumption in Mexico has registered a slow start this year

The Mexican economy grew at a paltry 1.1 per cent in 2013, and while we still expect 3.8 per cent growth in 2015, we have reduced our forecast for this year’s recovery from 3.7 per cent to 2.7 per cent.

Our revision is based on the neighbouring US economy’s slowdown in early 2014 plus, on the domestic side, a stronger-than-estimated negative impact of the fiscal reform that is causing consumption and investment to struggle to grow.

Mexico’s external demand in the first quarter of 2014 showed no clear recovery on the back of slower US growth. That may be attributed partly to winter weather that resulted in lower US consumer spending.

The US’s average growth rate in the quarter was just 0.1 per cent, reflecting a strong slowdown in the economy that has led us to reduce our 2014 GDP forecast for the US from 2.5 per cent to 2.3 per cent.

We still believe a strong Mexican recovery will start in the second half of this year

However, for the second quarter, US growth should rebound in sectors hit by the disruptive weather and Mexican industrial production has already registered a moderate recovery – although this may result from resumed production at car plants that applied partial shutdowns for retooling, and may not reflect stronger external demand.

Meanwhile, the stronger-than-expected negative impact from the fiscal reform in Mexico has caused consumption and investment to struggle to grow. Consumption has registered a slow start this year, although retail sales seem to have touched bottom and consumer sentiment bounced back after a sharp drop in January. But while gross fixed investment recovers moderately, a stagnant producer’s confidence index suggests companies are still cautious.

We still believe a strong Mexican recovery will start in the second half of this year and that a 12-month GDP growth rate of around 3.5 per cent may be achievable between the second half of this year and the first half of 2015. At some point, this year’s fiscal stimuli will help support economic growth: the government raised its planned expenditure by 20 per cent in the first quarter.

In addition, some of the factors that dampened economic activity in 2013 are not present this year. These include the crisis in low-income housebuilding, the political cycle of government transition and the change in the statistical base of national accounts from 2003 to 2008. HSBC’s economists expect US growth to recover to 3.7 per cent in the second quarter with the underlying annual growth trajectory returning to around 2.5 per cent, providing a potential base for growth for Mexico.

Improved execution of the infrastructure projects outlined in the National Infrastructure Programme, plus higher expenditure associated with the mid-term elections in Congress, should give support to the economy. In addition, there should be a marginal impact as the structural reforms start to materialise: on energy reform, for instance, the government expects new contracts to be signed this year. That’s why we are keeping our 2015 GDP growth forecast at 3.8 per cent.

This research was first published on 26 May 2014.
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