According to analysts from Wells Fargo, the Mexican economy rose by a faster-than-expected 0.6 percent in Q1 from the prior quarter. Much of the gain was centralized in the tertiary and primary sectors as the secondary sector was unchanged.
Key highlights:
Mexican Q1 GDP Beats Expectations
Mexico, Latin America’s second-largest economy, released its preliminary data for first quarter GDP, which bested market expectations of a 0.5 percent quarterly increase by rising 0.6 percent and expanding by a faster-than-expected 2.5 percent pace year over year. In addition to the solid print, Mexico’s Economic Activity Index, which is a proxy for GDP growth, rose 2.2 percent year over year in February, and pointed to growth ahead of the release.
We will not have the detailed breakout until next month, but, by sector, growth was predominantly in the primary and tertiary sectors as the secondary sector was flat over the quarter. Mexico’s volatile primary sector edged up 0.7 percent over the quarter and rose an impressive 6.5 percent year over year. Agriculture makes up a small part of the economy but was experiencing outsized gains of more than 9 percent year over year at the end of 2016. The tertiary sector, which consists mainly of services, rose 1 percent over the quarter and 3.8 percent year over year. Demand for services has been weaker as rising consumer prices weigh on consumption.
Secondary Sector Slowdown
Mexico’s secondary sector was relatively unchanged from Q4 2016 and contracted 1.3 percent on a year-ago basis. Recall that the secondary sector includes industrial production, which has weakened due to a decrease in mining and utilities. Petroleum production remains a shadow of its former self and has not been this low since the mid-1990s; however, oil prices are starting to recover. Manufacturing was flat over the month in February. Conversely, vehicle production in Mexico remains elevated and is up 17.1 percent year over year in Q1. Moreover, the softness seen in the secondary sector also weighed on exports, which registered a modest trade deficit in March as the manufacturing surplus was offset by the drag from petroleum.
Revised Outlook Remains Intact
The strong Q1 GDP reading bodes well for our forecast; however, planned renegotiations of NAFTA are expected to, perhaps, shift focus to the Rules of Origin as the Trump administration is no longer trying to fully withdraw from the agreement. That said, an increase in the amount of U.S.-made components in Mexican exports could weigh on export growth and whittle away at the Mexican trade surplus with the United States, which was nearly $10 billion for the first two months of the year. However, until these proposals come to fruition, we expect the Mexican economy to trek along at a 1.2 percent annualized pace this year before increasing to 1.9 percent in 2018.
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