Mexico’s IP growth likely contracted in December on weakness in manufacturing and construction sector

Mexico's industrial production (IP) growth in 2015 was weak, further slowing in Q4. The six-month moving average for year-on-year growth dropped to 0.97% in November 2015 from 2.88% in December 2014. The nation's industrial production is likely to have contracted 0.2% y/y in December, the first contraction since May. Hence, industrial production growth is expected to have dropped to 0.9% in 2015 from 2.6% in 2014. Manufacturing sector and construction sector has led to the additional drags on industrial production in recent months.

All the industrial production components, except electricity, water and gas, either slowed through 2015 or weighed on the index. The relatively positive growth in manufacturing in the last few years was mainly due to the strengthening of US growth and a rise in vehicle exports. With the help of the positive outlook of the US economy, Mexico's real export growth has continued to be relatively strong.

The rebound in the exports' competitiveness, and hence the stronger growth in investment, was achieved with the help of lower wage growth in a weak labor market and should be supported by the depreciating peso.

In 2016, Mexico is expected to post stronger trade and manufacturing growth and help stimulate the rest of the economy through the channels of employment, investment, sentiment and wage. However, the decline in US growth expectations and persistent slack in industrial production growth might considerably impact Mexico's growth, industrial production and exports. There has been an increase in the downside risk coming from this possibility.