The outlook for Mexican economy has brightened in recent months with demand from the U.S. strengthening and also with signs that domestic activity is recovering, according to Capital Economics.

At the same time Capital Economics has raised doubts on whether the current strong pace of growth can be sustained and suspects that economic growth will remain solid over the coming years.

Mexican industrial production increased at an annual rate of 4.2 percent in January, up from 2.8 percent in December of last year. Capital Economics points out that the breakdown revealed that manufacturing was key driver of growth, up 1.0 percent m/m following strong growth of 1.3 percent m/m in December.

However, Capital Economics says that there are reasons to be cautiously optimistic. First of all following better than expected news from the labor market, the U.S. economy is expected to expand by 2.0 percent this year and by 2.5 percent next year. More generally, a stronger U.S. growth implies a greater demand for Mexican industrial products.

Second, Capital Economics notes that there have been some tentative signs that Mexican firms have begun to diversify their export markets. Clearly, the U.S. remains the most important source of demand for Mexican exports, accounting for around two thirds of the increase in exports in the twelve months to January. Shipments to Latin America contributed 12 percent of the increase in the year to January, while exports to Asia made up a further 10 percent in total.

Finally, Capital Economics adds that there have been further signs of improvement in the domestic economy in recent months. The services sector made a strong contribution to growth last year on the back of a pick-up in bank lending and consumer confidence.

Despite all this, Capital Economics suspects that economic growth will be solid rather than spectacular over the coming years. It has forecast that GDP will expand by around 2.8 percent this year and 3.0 percent in 2013.