Mexican economy expands strongly in Q1, likely to grow 1.2 pct this year

The preliminary data of Mexico’s first quarter showed that the economy expanded more than expectations in the March quarter. The GDP grew 0.6 percent on a sequential basis, as compared with market projections of 0.5 percent. On a year-on-year basis, the economy grew 2.5 percent in the first quarter. Moreover, the Mexico’s Economic Activity Index, which is a proxy for GDP growth, was up 2.2 percent year-on-year in February and indicated towards growth ahead of the release.

The volatile primary sector of Mexico rose 0.7 percent sequentially and 6.5 percent year-on-year. On the other hand, the country’s secondary sector was relatively unchanged on a sequential basis but shrank 1.3 percent on a year-on-year basis. Industrial production had subdued because of a decrease in mining and utilities. Petroleum production continues to be a shadow of its former self and has not been this low since the mid-1990s. Manufacturing remained flat on a month-on-month basis.

On the contrary, vehicle production continues to be high and rose 17.1 percent year-on-year in the first quarter. Furthermore, the weakness witnessed in the secondary sector was a drag on exports that recorded a modest trade deficit in March as the manufacturing surplus was countered by the drag from petroleum.

The robust reading for the first quarter augurs well for projections, but planned renegotiations of NAFTA are likely to possibly shift focus to the Rules of Origin as the Trump administration is no longer attempting to totally withdraw from the agreement. However, a rise in the amount of U.S.-made components in Mexico’s exports might be a drag on export growth and whittle away at the Mexican trade surplus with the U.S., which was almost USD 10 billion for the initial two months of the year, stated Wells Fargo in a research report.

“We expect the Mexican economy to trek along at a 1.2 percent annualized pace this year before increasing to 1.9 percent in 2018”, added Wells Fargo.