MexECON Blog

Private Investment Drives Growth

In an updated estimate, Mexico's first-quarter gross domestic product (GDP) was up 0.5% from the fourth quarter of 2012, after adjusting for normal seasonal variations and stripping out price changes.  The increase was weaker than the revised 0.7% expansion in the fourth quarter, but it was stronger than the third-quarter rise of 0.3%.  According to the report, released Wednesday by the official statistics agency INEGI, private fixed investment was the main source of Mexico's growth in the first quarter.  Private investment rose 1.4%, after gaining 2.0% in the fourth quarter.  Private consumption spending was also a source of growth.  It was up only 0.2%, but because it accounts for so much of Mexican economic activity, that was enough to make a significant contribution to overall growth.  In contrast, the main drag on the economy was international trade, as exports declined 0.6% and imports stayed essentially unchanged.  Public investment also was a detriment, as it declined 3.1%.

Without seasonal adjustments, Mexico's first-quarter GDP was up just 0.8% from the same period one year earlier.  That was the weakest year-over-year gain since the current expansion began in 2009. 

Comment:  Many observers were alarmed by Mexico's first-quarter GDP data.  The year-over-year rise of just 0.8% was a dramatic slowdown from the increases seen earlier in the expansion.  Mexican GDP had shown annual increases of 3.2% in each of the last two quarters of 2012, and it had grown in excess of 4.0% in most of the quarters since the beginning of the cycle.  I agree that the figures were weak, but they were not quite as bad as many people perceive.  For example, part of the reason for the first quarter's tepid year-over-year growth can be attributed to the fact that Mexican GDP surged in the first quarter of 2012, making for a tough base of comparison.  In addition, it is important to remember that the quarter-over-quarter rise of 0.5% was only slightly weaker than the average increase in the last three periods of 2012.  Finally, the weak first-quarter growth figures seem to reflect temporary problems that the most recent reports suggest are dissipating.  The U.S. economy is still growing and may even accelerate in the coming months, so Mexico's trade sector has the potential for a rebound.  The weakness in Mexican public investment appears to stem in large part from the transition to Mexico's new president in December, so once the bureaucracy adjusts, that sector could strengthen again or at least stabilize.  The main thing to watch is whether private consumption can reaccelerate.  Private consumption is a big part of Mexico's economy, but the economic soft spot around the turn of the year led to decreased hiring, weaker confidence, and a significant pullback in consumer spending.  A rebound in Mexican exports and investment may be in the cards, but progress will have to be substantial before the consumer can start driving stronger growth again.

Patrick Fearon, CFA
Vice President, Fund Management

GDP 2013 Q1 Revised

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