MexECON Blog

Quarterly Economic Overview - 2013 Q1

In the fourth quarter of 2012, Mexico's inflation-adjusted gross domestic product (GDP) was up 3.2% from the same period one year earlier, matching the revised increase in the third quarter but falling short of the strong increases earlier in the year.  Full-year GDP was up 3.9% from 2011.  The Mexican economy grew at an average rate of just 2.6% in the previous two decades, so the performance in 2012 was relatively good.  However, signs of slower growth and potential instability are increasingly evident.

Personal consumption spending was the main impetus to Mexico's economy in 2012, rising 3.3% and accounting for more than half the total increase in GDP.  With the economy in its third straight year of solid growth, unemployment declined gradually to a low of 4.7% in September, before rebounding modestly in the last three months of the year.  Consumer optimism improved, and retail sales rose briskly, at least until a sharp drop in December.  Exports of goods and services were also a key contributor to Mexico's growth in 2012.  Sales abroad grew much more slowly than at the beginning of the expansion cycle, and they flattened out in the second half, but they still posted a decent rise of 4.6% for the year.  The expansion in exports came mostly from stronger sales of manufactured goods.  Mexico's final big source of growth in 2012 was capital investment, which rose 5.9%.  Nevertheless, the growth in investment was weaker than in 2011, in large part reflecting a slide in construction activity throughout the second half of the year. 

Mexican stability indicators remain generally healthy.  The September consumer price index (CPI) was up 4.8% from one year earlier, marking the highest inflation in three years, but the surge was mostly because of transitory food supply shocks.  Inflation dropped back down to 3.6% in December, and it has remained at about that level so far in 2013.  The retreat in inflation allowed Banco de México to cut its benchmark interest rate to 4.00% in early March, after keeping rates at 4.50% since mid-2009.  In fiscal policy, the government continues to demonstrate more discipline than most other major countries.  Official data show Mexico's public sector deficit came to 2.6% of GDP in 2012, virtually unchanged from a revised 2.5% in 2011.  For comparison, the Organization for Economic Cooperation and Development (OECD) recently estimated the U.S. deficit was 8.5% of GDP in 2012.  Mexico's public sector net debt stood at 26.5% of GDP at the end of 2012, while the OECD says U.S. net debt stood at 86.5% of GDP.

Despite the good figures on inflation, fiscal policy, and debt-or perhaps because of them-the data on Mexican capital flows has started to show some potential imbalances.  Portfolio investment (net foreign purchases of Mexican stocks and bonds) surged 59.7% in 2012, reaching a record $73.4 billion.  Most of that increase reflected purchases of Mexican government bonds.  In contrast, foreign direct investment (net foreign purchases of land, factories, office buildings, and other hard assets) showed an outflow of $12.9 billion in 2012, more than offsetting the $9.4-billion inflow in the prior year.  Bank lending and other investment also showed net outflows in 2012.  Overall, the net financial inflow in 2012 was not only strong enough to cover Mexico's current account deficit, but it also boosted the country's foreign reserves to a record $163.5 billion.  The capital flows also put upward pressure on the peso.  Data from the U.S. Federal Reserve show the peso's average spot-market value rose from $0.07554 (13.24 pesos per dollar) in the first half of 2012 to $0.07665 (13.05 pesos per dollar) in the second half.  The main problem with the inflows is that they constitute "hot money" that could reverse massively, suddenly, and unpredictably.  Policymakers at Banco de México cited this risk as one reason for their rate cut in March.  In an environment where central banks around the world are keeping interest rates extremely low, cutting Mexican rates seemed like a good way to discourage international investors from sending their money to Mexico.  However, the move appeared to backfire.  Capital flows into Mexico have strengthened since the rate cut, and the peso has climbed further.  It remains to be seen whether the policymakers will get control of the situation before something happens to spook the hot money out of Mexico.  If the hot money does reverse course suddenly, it could produce a big fall in the peso, higher inflation, spiking interest rates, and weaker economic growth.

Looking forward, Mexico's near-term economic prospects have worsened.  One reason for the weakness at the turn of the year was caution ahead of the December inauguration of Mexico's new president.  Another reason was fear regarding the U.S. "fiscal cliff" in January.  Some sectors of the economy are now showing a tentative rebound from those challenges, but the episode still demonstrates how vulnerable Mexico is to political and international risks.  At the very least, Mexico's extraordinary economic rebound since 2009 is now maturing, and growth will naturally tend to moderate from here.  The International Monetary Fund (IMF) currently forecasts Mexican GDP growth will slow to 3.5% in both 2013 and 2014.  That would still be stronger than the country's long-term average, but slower growth gives the country less of a cushion in case more significant economic problems arise.  A sharper slowdown or even an economic contraction starting in the next year cannot be ruled out.

Paradoxically, Mexico's longer-term prospects appear to be improving.  Mexican competitiveness has improved remarkably since the middle of the last decade, in large part because of surging wages in China, an appreciation of the Chinese currency, and higher international transportation costs.  Now, Mexico is also starting to take its own steps toward boosting growth.  Not only did the former administration push through a labor reform in late 2012, but the new president has moved to accelerate the reform process and reassert government authority over the country.  To address problems such as declining oil production and excess monopolization in key sectors of the economy, President Peña Nieto has launched efforts to bring more private capital into the energy sector and bolster competition in television and telecommunications.  He is also hoping to broaden the tax base and improve tax collection in order to reverse chronic under-investment in the public sector.  If these initiatives bear fruit, it would help sustain Mexico's recent good growth rates and ensure continued economic stability.

Patrick Fearon, CFA
Vice President, Fund Management

GDP 2012 Q4 - Quarterly Report

1 comment(s) for “Quarterly Economic Overview - 2013 Q1”

  1. Gravatar of Michael A. Church
    Michael A. Church says:
    Mexico is performing creditably well and comparatively better than many other economies. It is necessary in order to stay on that growth trajectory the construction sector is supported to achieve increased expansion, among other initiatives. While foreign direct investment is having a positive effect on growth, the encouragement of the indigenisation of investment must be encouraged through the requisite policy approaches, at least, to balance off the potential pitfalls that could come with over dependence on the dictates of the globalisation philosophy.

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