Mexico's economic growth still impressive given the slowdown of industrial sector

Economic activity has surprised to upside in recent months considering the slowdown in industrial production. Industrial production growth over past six months (including the July 2015 release) slowed to 1.0% yoy from 2.0% in the previous six months, overall economic activity growth accelerated to 2.42% yoy from 2.40%. Clearly, the contribution of other sectors (excluding IP) to growth has risen substantially over the past few months. H1 GDP data shows that while IP growth slowed to 1.5% yoy in Q1 and 0.6% in Q2, the services sector accelerated to 3.0% yoy and 3.1% over the same period. 

The weakness in IP growth is predominantly driven by the decline in mining production, which is facing adverse demand and price conditions. That said, manufacturing growth over tha past six months was also slower than the previous six months and it remains to be seen whether stronger US demand alone can pull the overall IP sector out of the current phase of mild slowdown. 

Recent weakness apart, the IP improvement since last year largely has been driven by strengthening US growth and a jump in vehicle exports. Mexico's real export growth has surged impressively on average. The improvement in the competitiveness of exports - and, therefore, stronger investment growth - was achieved via lower wage growth in a weak labour market and should be helped by the weakening peso. 

"We continue to expect stronger manufacturing and trade gains in H2 15, boosting the rest of the economy via the investment, employment, wage and sentiment channels. Improvement in IP growth through the remainder of this year should help the economy grow to its potential in H2 15 and then to strengthen in 2016. Currently, we expect the Mexican economy to grow by 2.3% in 2015 and 3.1% in 2016", says Societe Generale.