Mexico’s industrial output likely grew in January as manufacturing rebounds

In 2015, Mexico's industrial production was disappointing, and it slowed further in Q4. Industrial output had grown 1% in 2015, as compared with 2.6% growth in 2014. One part of the slowdown was because of slowdown in manufacturing, whereas the bulk of the slowdown was due to a sharper decline in mining sector and a drop in construction sector.

However, the recent figures imply that manufacturing likely expanded at a moderate pace in January partially because of strong base effect. Meanwhile, the pace of mining contraction seems to have slowed slightly and the construction sector seems to be a drag on industrial production in 2016.

"These trends and the trade numbers lead us to project IP growth of 0.3% yoy (0.4% mom) even though manufacturing (3.4% yoy) likely saw expansion at the fastest pace in four months".

In the past couple of years, strengthening US growth and boost in vehicle exports drove growth in manufacturing. Mexico's real export growth has continued to be strong with the help of healthy outlook for the US economy. The rebound in exports' competitiveness, and hence a stronger growth in investment, was attained through lower wage growth in a weak labor market and should be assisted by the weakening peso.

Mexico is expected to post stronger trade and manufacturing gains in 2016 and beyond to stimulate the rest of the economy through sentiment channels, wage, employment and investment. However, the persistent slowdown in US IP growth and decline in US growth expectations might considerably impact Mexican exports, growth and industrial production. The risks on the downside emerging from this possibility have increased in recent months.

Meanwhile, the supply side economy is performing much better as the service sector accelerated in H2 with the help of stronger domestic consumption demand. However, service growth will decelerate if the manufacturing-led slowdown impacts income growth and employment.