Mexico's recovery slows down

Mexico’s economy expanded by 5.3 percent on an annualized basis, significantly below the 7.6 percent growth recorded in the second quarter, the country’s INEGI statistical office INEGI showed on Monday.

Economists were forecasting a 5.7 percent increase in the third quarter. By comparison, the Mexican GDP contracted by the 5.5 percent in the year-ago quarter.

On a sequential basis, GDP grew a seasonally adjusted 0.73 percent in the third quarter.

Mexico, Latin America’s second-largest economy appears to still be rebounding from last year’s recession, but at a slower pace. Mexico’s economy shrank 6.5 percent in calendar 2009, the worst contraction since 1932.

Jimena Zuniga, an economist at Barclays Capital in New York, forecasts economic growth of 5.1 percent for 2010 and 3.2 percent for 2011.

Ongoing problems in the US will prevent Mexican growth from topping 3 percent or so for the next couple of years – below the current consensus forecast, said Neil Shearing, senior emerging markets analyst at Capital Economics in London.

“Of course, it’s worth noting that the quarterly growth rates tend to be volatile,” he said.

“Output collapsed during the first half of 2009, staged a recovery over the second half of last year and was then impacted by January’s fiscal tightening, which caused GDP to contract in [the first quarter] ... before bouncing once again in [the second quarter].”

Nonetheless, Shearing points to two troubling aspects to Mexico’s economy

“First, in levels terms, real GDP is still 0.7 percent below its pre-crisis high,” he said.

“This marks Mexico out from the rest of Latin America. The Brazilian economy, for example, is now around 5 percent larger than it was in mid-2008.”

The second point, he stated, worth noting is that quarterly growth of around 0.7 percent is likely to be the norm for the next couple of years at least.

“While the consensus is forecasting growth of 3.5 percent in 2011 and 4.2 percent in 2012, we expect the economy to expand by a more modest 3 percent in both years,” Shearing explained.

“What’s more, the risks, particularly in 2011, are skewed to the downside.”

Among the bright spots in Mexico are robust agricultural output (8.9 percent increase year-over-year) and strength in some service sector industries.

“Other parts of the services sector, however, are still struggling,” Shearing added.

“Financial services grew by just 0.7 percent year-over-year, while real estate was up by just 0.8 percent year-over-year. What’s more, the performance of the manufacturing sector (up 1 percent quarter-over-quarter, 9.6 percent year-over-year) is not as impressive as it seems at first sight. For a start, it was driven by bumper growth in a relatively small number of sub-sectors -- notably the production of vehicles (up 36 percent year-over-year) and machinery and equipment (up 54 percent year-over-year). At the same time, it seems that growth in these sub-sectors is likely to slow over the coming quarters.”

Shearing further warned that Mexican manufacturing is unlikely to forge ahead while the US
economy is stuck in a rut -- exports to north of the border are equivalent to 25 percent of GDP.