Mexico’s Q3 GDP Beats Expectations, But Near-Term Future Looks Cloudy

 @PReyMallen
on November 21 2013 1:37 PM

Mexico’s third-quarter GDP grew by 0.84 percent over the prior quarter and climbed by 1.3 percent over the year-ago period, surpassing initial estimates and also reversing a contraction from the second quarter, according to the country’s Instituto Nacional de Estadística y Geografía (National Institute of Statistics and Geography, or INEGI).

“The economy seems to have stabilized during the third quarter and initiated a gradual recovery, anchored by the recovery of manufacturing production,” Alberto Ramos, the chief Latin America economist for Goldman Sachs Group Inc. in New York, told Bloomberg News. “There is no need to add more monetary stimulus to the economy in the short run.” (Mexico’s central bank has already cut the key interest rate thrice this year to 3.5 percent, an all-time low.)

Major drivers of growth in the economy were an expansion of Mexico’s huge manufacturing sector, which grew by 2.9 percent in the third quarter (over the year-ago period), agriculture (up 1 percent) and service industry (up 2.3 percent), all of which helped to mitigate negative effects of a 6.9 percent decline in construction and a 0.6 percent fall in industrial activity.

But, reflecting the ongoing uncertainties, Mexico’s finance ministry cut its GDP forecast for this year to 1.3 percent from its 1.7 percent estimate in September, yet another downgrade (the ministry began 2013 projecting 3.5 percent growth for the full year). According to the Wall Street Journal, Mexico’s deputy finance minister, Fernando Aportela, told a press conference that the ministry expects the economy to grow by 1.7 percent in the fourth quarter, bringing full-year growth to the aforementioned 1.3 percent. For 2014 the government predicts growth of 3.9 percent.

Analysts seem divided over Mexico’s near-term prospects. Rodrigo Aguilera, the Mexico analyst for The Economist Intelligence Unit, expressed some caution. “The third-quarter results will be a sigh of relief after a terrible first half of the year,” Aguilera said in a statement. “With the global picture looking better than before, the fourth quarter should also bring in some good news. However, the outlook for 2014 is still somewhat clouded by risks, and this should preclude a more sustained rebound.” Aguilera pointed out, for example, that the housing crisis, which has triggered a slump in construction activity, is still a prevalent force.

“Likewise, many of the provisions in the recently passed fiscal reform will have short-term impacts against consumption and investment in 2014, even though its longer-term prospects are more positive,” he added. “Although 2014 may be a far better year overall, it's quite possible that the ‘Aztec Tiger’ [Mexico] won't truly roar again until 2015.”

In contrast, Capital Economics, a London-based research firm, stands out as highly sanguine about Mexico’s near-term future, saying the economy could expand by 4 percent next year. “We expect Mexico’s [relatively] poor performance in the third quarter [of 2013] to be the low point for the economy,” said Capital Economics’ emerging markets economist, David Rees. “GDP remains on course to accelerate to over 4 percent during 2014, making it one of Latin America’s relative outperformers.” Rees also noted that the outlook for the domestic economy is also “brightening.” “The Mexican Congress recently approved [a] wider government budget deficit as the authorities plan to increase infrastructure spending next year,” Rees said. “That should support the beleaguered construction sector. Moreover, policymakers are due to start debating a long-awaited energy reform, which could eventually lead to an increase in investment in the oil sector, which should in turn boost the overall mining sector.”                

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Note: Photo by Shutterstock.com.

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