Sluggish Q113 Prompts Growth Downgrade
BMI View: After the Mexican economy disappointed in Q113, and high frequency data suggests that the manufacturing sector is still struggling to gain traction in Q213, we are revising down our 2013 real GDP growth forecast, from 3.6% to 3.0%. W hile we continue to expect the economy to accelerate in the latter half of the year, this will not be sufficient to offset the lacklustre growth seen in the first half, especially given potential for a weaker peso and only slowly improving labour market dynamics to weigh on consumer purchasing power.
After Mexico's Q113 growth came in at just 0.8% year-on-year (y-o-y), we are revising our real GDP growth forecasts for Mexico from 3.6% to 3.0% in 2013. While we had long expected the Mexican economy would slow this year on the back of weaker external demand for the country's manufactured exports and a decline in consumer purchasing power, the extent of the deterioration has been greater than we had initially envisioned. While partially due to calendar effects, we believe this also suggests that the previously flagged risks to our forecast, including more moderate US growth and higher inflation ( see ' Growth Set For Reacceleration In H213', April 26 And 'Rising Downside Risks To Growth Outlook', May 17), have begun to play out, weighing on exports and investment. Moreover, while by H213 we believe the economy will begin to improve, we no longer believe it will be sufficient to see full-year growth hit our initial forecast. As such, while we remain optimistic on Mexico's long term economic outlook, noting that its strong trade ties to the US and an ongoing reform drive are likely to boost growth considerably over a multi-year period, we believe that in 2013 the economy is set for more sluggish growth than we had initially anticipated.
Uncertain External Environment To Continue Weighing Manufacturing And Investment
Weaker external demand on the back of a fragile US recovery, and a still uncertain global economic environment weighed heavily on exports and investment in early 2013. While we expect noticeable improvement toward the latter half of the year, high frequency data suggests the recovery may take longer to gain traction than we had expected.
|Inventories Eclipse New Orders|
|Mexico - New Orders Index (LHS) & New Orders Minus Inventories (RHS)|
Mexico's manufactured exports (80.7% of total exports) are facing strong headwinds. After expanding by only 2.2% y-o-y through April, the May IMEF Manufacturing Index showed new orders less inventories plummeting into negative territory for the first time since the crisis, suggesting manufacturing firms remain cautious, and that we are unlikely to see as substantial an acceleration as we had expected. We attribute this to a slowing of the massive US pent-up demand, which saw Mexican manufactured exports boom last year, as well as unfavorable short-term trade agreements with Brazil and Argentina coming into force ( see 'Production Slowdown As Regional Trade Agreements Bite', March 7). As such, while our analysis calls for a continued slow recovery in US overall private consumption, highlighting a modest improvement in household balance sheets and rising real wages, which will begin to feed through to stronger Mexican manufacturing sector activity in the second half of the year, we do not believe this will be sufficient to offset a weaker than expected H113.
|Weak Fixed Investment|
|Mexico - Gross Fixed Capital Formation And Subsectors, % chg y-o-y|
Meanwhile, early indicators of gross fixed capital formation suggest it will struggle to hit our original 2013 6.8% growth target. This is in part due to weak public fixed investment, as it is the first year of a new presidential administration, which usually means that there is a lag in new projects. However, we also believe that private investment has been sluggish given a still uncertain global economic environment, with corporates still hoarding cash. While we believe that a stronger growth outlook in the US will begin to see an expansion in willingness to invest, we note that this may take longer to play out than we initially expected.
Peso Weakness Could Slow Consumer Recovery
Mexican households' buying power has come under considerable pressure in early 2013, encouraging us to pare back our 2013 private consumption forecast. Labour market dynamics remain poor, with unemployment still well above its pre-crisis levels, at 5.0% in April (5.1% seasonally adjusted), and likely to only slowly improve given a weak manufacturing sector. Meanwhile, consumer credit has decelerated noticeably since its December 2011 high of 26.3% y-o-y. Finally, we note that consumer price inflation remains elevated, coming in at 4.6% y-o-y in May. While our core view is for the CPI reading to fall back within the central bank's 2.0-4.0% target band by H213 , with the peso having depreciated dramatically in recent weeks, and the currency likely to remain vulnerable to sharp sell-offs, we cannot rule out the potential for greater imported inflation to see prices stay higher for longer than we had initially anticipated.
|Struggling To Push Lower|
|Mexico - Unemployment|
Ultimately, we believe that the Mexico's consumer story is set for a recovery in the latter half of 2013, and will likely continue to pick up speed in 2014. Indeed, aside from the more favourable base effects, the 50 basis point policy rate cut implemented in March will have begun to more noticeably feed through to the economy. Moreover, as the manufacturing sector regains its footing this will see an improvement in labour market dynamics and consumer sentiment. That said, given the extent of the weakness suggested by Q113 data, and the potential for continued peso volatility to eat into purchasing power we have pared back our expectations for Mexico's 2013 domestic demand growth.
Well Placed To Benefit From Stronger US In 2014
We believe that the acceleration in Mexico's growth in H213 will continue into 2014, and, as such, have modestly revised up our forecast, from 3.8% to 3.9%. Indeed, with the recovery in the consumer story to begin a little after we had initially anticipated, we believe that some of the benefits to headline growth will come in 2014 rather than 2013. Moreover, the uncertain global outlook, which has weighed on private investment in early 2013 will have largely dissipated by next year, allowing the country's strong business environment to act as a considerable pull for investment. Ultimately, while growth has disappointed in early 2013, we believe this is more due to short-term factors, and does not dent our optimistic long-term economic outlook on Mexico.
|Growth Gaining Legs In 2014|
|Mexico - GDP By Expenditure|
Risks To Outlook
S tronger growth in H213 is largely predicated on a continued gradual economic recovery in the US, with slower growth in the US acting as the major downside risk. That said, even if the US does begin to recover, this does not necessarily assure stronger growth in Mexico in the short term. Indeed, if we were to see the US economy improve sufficiently to bring an early end to quantitative easing, that would likely have a sharp depreciatory impact on the peso, and the detrimental impact on the Mexican consumer might outweigh the positive impact of a stronger manufacturing sector.