Itaú BBA - MEXICO – 2Q19 GDP revised down

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MEXICO – 2Q19 GDP revised down

agosto 23, 2019

Mining and construction sectors were the main drags to economic activity

GDP in 2Q19 was revised to the downside. Mexico’s monthly GDP proxy (IGAE) contracted 0.9% year-over-year in June (from -0.4% in May), below our forecast and median market expectations as per Bloomberg (-0.6%) – which implied a GDP contraction of 0.8% year-over-year in 2Q19 (revised down from the flash estimate of -0.7%, announced by the Statistics Institute three weeks ago and down from 1.2% in 1Q19). Looking at the breakdown, revisions came from industrial sector (-3.0%, previously: -2.8%) and services sector (0.0%, previously: 0.1%). 

Mining and construction sectors were the main drags to economic activity. GDP in 2Q19 was partly dragged by a negative calendar effect (Easter holidays). Using calendar adjusted figures (published by the Statistics Institute), GDP posted growth of 0.3% in 2Q19 (from 0.1% in the 1Q19), but remained weak. Looking at the breakdown, the industrial sector was the main drag to economic activity, decreasing 1.7% in 2Q19 (from -1.9%), with mining contracting 7.8% (from -7.6%) due to the fall in oil output, while construction sector fell by 5.3% (from -2.4%), associated partly to a delay in public expenditure execution and fiscal austerity measures. Meanwhile, manufacturing sector improved to 1.5% year-over-year in 2Q19 (from -0.1% in 2Q19) and services sector grew 0.9% in 2Q19 (practically unchanged from 1Q19). Primary sector decelerated to 1.4% in 2Q19 (from 5.7% in 1Q19). GDP excluding primary sector and mining output grew 0.6% year-over-year in 2Q19 (from 0.4% in the 1Q19), also adjusted by calendar effects. 

At the margin, 2Q19 GDP was almost flat. Seasonally-adjusted GDP expanded 0.1% (annualized) in 2Q19 (from -1.0% in 1Q19). Looking at the breakdown, also with qoq/saar figures, primary sector contracted 12.8% (from 6.4%), while services sector recovered to 0.9% (from -1.1%). In turn, industrial sector fell by 0.8% qoq/saar in 2Q19 (from -1.9% in 1Q19), with mining falling by 4.3% (from -4.9%), while manufacturing improved to 4.7% (from 0.0%). The improvement in manufacturing output (despite the deceleration in the US economy) could be partly associated to a low base effect in 1Q19, after the strikes in the state of Tamaulipas and Michoacán disrupted manufacturing production in 1Q19. Importantly, GDP excluding primary sectors and mining output improved to 0.8% qoq/saar in the 2Q19 (from -1.1% in 1Q19).  

We expect GDP growth of 0.6% for 2019. Weak economic activity in the U.S. is expected to drag down Mexico’s manufacturing sector. Uncertainties over the direction of domestic policy and trade relations with the U.S. are also expected to continue to weigh on investment. The government-transition effect and austerity measures pose further downside pressure on economic activity. However, recent inflation-adjusted wage increases are a buffer for activity, sustaining the real wage bill and smoothing the consumption slowdown.

Julio Ruiz

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