MexECON Blog

Second Quarter GDP Growth Confirmed

The official statistics agency INEGI today confirmed Mexico's second-quarter gross domestic product (GDP) jumped 3.2%, after adjusting for seasonal factors and stripping out price changes.  The increase easily reversed the revised decline of 0.6% in the first quarter, and it even beat the strong increases of 2.4% and 2.5% in the final two quarters of 2009.  In fact, the expansion in the second quarter of 2010 was the strongest in over fourteen years, and at an annualized rate of 13.5%, the increase was even faster than recent Chinese and Indian growth rates.  Consistent with recent patterns, Mexican economic growth in the second quarter stemmed primarily from foreign trade.  The report showed Mexican exports grew 6.6% in the second quarter, while imports grew just 5.8%.  Almost as important, second-quarter personal consumption spending was up 2.0%, marking its best rise since mid-2007 and suggesting Mexico's economic rebound could be starting to broaden, even in the face of rising violence from the country's drug cartels, relatively high unemployment, reduced remittances from relatives working in the United States, and a continuing credit crunch.  Finally, Mexico's relatively small government sector increased its spending by 3.2% in the second quarter, also marking its strongest growth since mid-2007.  The main detractors from growth in the second quarter were corporate fixed investment, which fell slightly, and inventories, which were reduced rapidly.

Without seasonal adjustments, Mexico's second-quarter GDP was up a robust 7.6% from the same quarter one year earlier, marking a significant acceleration from the 4.3% increase in the year ended in the first quarter.  Prior to the rise in the first quarter, Mexican GDP had fallen on a year-over-year basis for five straight quarters.  The report showed that the year-over-year increase in the second quarter was driven primarily by net exports, consumption, and government spending.

The data from INEGI show that Mexico's economy reached its lowest point in the second quarter of 2009.  Now that the National Bureau of Economic Research has announced that the U.S. recession ended in June 2009, it appears the two economies bottomed out at essentially the same time.  In the five quarters since its trough, the Mexican economy has grown 7.7%, with exports contributing 8.4%, consumption contributing 3.8%, and inventory investment contributing 1.7%.  Public spending contributed a combined 0.6%, but corporate investment detracted 0.3% and import growth detracted 7.7% (See chart.  Note that the unexplained remainder reflects difficulties in the seasonal adjustment process and other errors). 

Comment:  The most encouraging aspect of today's report is that Mexican consumption spending has now accelerated for a second straight quarter.  While unemployment is still relatively high in Mexico, it has been trending downward, and that is probably a key reason for the increased spending.  In addition, the relative stabilization of the U.S. economy appears to have reduced the rate of decline in remittances, which are an important source of income for many Mexican families.  Nevertheless, Mexico's current economic boom is still dangerously dependent on rebounding exports.   As shown in previous analyses on this blog, the export rebound primarily reflects increased sales of trucks, autos, and auto parts north of the border, and it is by no means clear that such sales increases can be sustained.  In fact, U.S. inventory rebuilding already appears to be slowing, and U.S. consumer and corporate demand is not yet accelerating.   That may explain why Mexican inventory investment has started to retreat again, while corporate fixed investment cannot seem to take off strongly.  Until Mexican corporate spending starts to increase faster and more steadily, the Mexican economic boom will be on an uncomfortably narrow foundation.

Patrick Fearon, CFA
Vice President, Fund Management

                                  Contributions to Mexican GDP Growth
                                First Five Quarters of Current Expansion
                                                          In Percent
                                                       Source:  INEGI
GDP 2010 Q2 Cont.

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