MexECON Blog

Investment Drives First Quarter GDP Growth

In an updated estimate, Mexico's first-quarter gross domestic product (GDP) was up 0.5% from the previous quarter, after adjusting for seasonal variations and stripping out price increases.  That followed revised increases of 1.1% in the fourth quarter of 2010 and 0.7% in the third quarter.  According to the report, from the official statistics agency INEGI, the main driver behind Mexico's growth in the first quarter was private fixed investment.  Gross investment in private-sector buildings, factories, and other long-lasting assets jumped 11.0%, after a revised decline of 0.1% in the fourth quarter.  The second-most important source of growth was exports, which expanded by a robust 4.7%, accelerating from a revised increase of 1.0% in the previous period.  After two straight quarters as the leading growth driver, private consumption came in as the third-most important source of growth, with an expansion of 0.9%.  The main drag on growth in the first quarter was a sharp decline in public investment.

Without seasonal adjustments, Mexico's first-quarter GDP was up 4.6% from the same period one year earlier, accelerating from the revised year-over-year gain of 4.4% in the fourth quarter but not quite as strong as the 5.1% increase in the third quarter.  Over the course of the last year, exports were the main driver behind the country's growth, with an increase of 14.1%.

Comment:  Mexico's economic growth has moderated from the blockbuster increases earlier in the current recovery.  However, this kind of moderation is to be expected as an economic rebound matures.  Most important, the country's growth rate remains healthy, even with the recent slowdown.  Mexico's growth has also now become much better balanced.  Rebounding exports were the predominant source of growth when the current recovery started in the third quarter of 2009, but now rising consumption and investment have begun to make a strong contribution as well.  Nevertheless, recent economic indicators have shown some weakness, and it is unlikely that Mexico will escape unharmed as many key developed countries enter into a soft spot in their recoveries.  The main near-term risk for Mexico is probably that exports and capital flows could slow more than expected if the global economic soft spot continues for too long.  That risk is exacerbated by the strong peso, which remains expensive even after its pullback this month.  Rising violence by drug cartels could also start to have a bigger negative impact on domestic consumption or investment, and as the 2012 presidential elections draw closer, there is an increased chance that the ruling party could implement destabilizing economic policies to curry favor with voters.  Finally, in the longer term, Mexican growth is unlikely to remain as strong as it is now if the government does not enact key structural reforms that would break up monopolies, deregulate the labor market, and otherwise increase competition and encourage investment.

Patrick Fearon, CFA
Vice President, Fund Management

GDP 2011 Q1 Revised

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