MexECON Blog

Fourth Quarter GDP Report Highlights Challenges

A new report confirms Mexico's fourth-quarter gross domestic product (GDP) was up just 0.2% from the third quarter, after adjusting for normal seasonal variations and stripping out price changes.  That was far weaker than the revised 0.9% gain in the third quarter, though it was better than the 0.7% decline in the quarter before that.  The main drag on growth in the fourth quarter was a modest decline in exports.  Foreign sales of Mexican goods and services fell 0.5%, for their first quarterly decrease since the end of 2012.  In addition, private fixed investment posted its fourth straight quarterly decline.  It was down 0.2%, after a 1.8% fall in the previous quarter.  Private consumption spending continued to grow, but it slowed dramatically.  The main contributors to economic growth in the fourth quarter were a rise in inventories and a jump in government consumption.

Without seasonal adjustments, Mexico's fourth-quarter GDP was up just 0.7% from the same period one year earlier.  That marked a significant slowdown from the year-over-year increases of 1.4% in the third quarter and 1.6% in the second quarter.  It was also far below Mexico's average annual GDP growth of 2.6% from 1992 to 2012.

The report was released Thursday by INEGI, the official statistics agency.

Comment:  I have been warning that Mexican economic growth would likely be restrained by problems ranging from tepid exports to weak domestic demand, and the new details on fourth-quarter growth are consistent with those concerns.  The modest pullback in exports probably reflects the tentative nature of the U.S. economic expansion.  Meanwhile, a change in government housing policy in Mexico has virtually frozen residential construction.  Those issues likely explain the drop in private investment in the fourth quarter, though the small size of the decrease suggests investment may be bottoming out.  Separately, the Mexican government was keeping a very tight rein on spending through much of 2013.  The new data suggest government spending on items such as salaries, supplies, and operations is starting to catch up again, but spending on public works is still weak.  All these problems have combined to keep a lid on hiring and salaries, and the result has been falling consumer sentiment, a dramatic slowdown in retail demand, and rising inventories of unsold goods.  New sales taxes that took effect on January 1 are likely to further undermine consumption in the coming months, while rising inventories will probably discourage manufacturing production.  It is true that Mexico's recent economic reforms could dismantle monopolies in industries such as telecommunications and energy and boost economic growth in the longer term, but they also have the potential to disrupt the economy and financial markets in the near term.  Even if Mexican economic growth accelerates again in the coming quarters, the overall growth rate is therefore likely to remain restrained.

Patrick Fearon, CFA
Vice President, Fund Management

GDP 2013 Q4 Revised 2


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