Mexico Economic Update
Mexico’s Economy Expands Marginally in Third Quarter
November 7, 2019
Mexico’s gross domestic product (GDP) grew at an annualized 0.4 percent pace in third quarter 2019. The consensus GDP growth forecast for 2019, compiled by Banco de México, held steady at 0.5 percent in September. GDP growth has consistently underperformed, remaining below its 10-year average for the past year and a half.
Other data were mixed. Exports fell, but industrial production, employment and retail sales were up. The peso gained ground against the dollar in October, and inflation fell.
Mexico's third-quarter GDP rose an annualized 0.4 percent on the heels of the second quarter's weak 0.1 percent gain (Chart 1). Service-related activities (wholesale and retail trade, transportation and business services) were flat in the third quarter. Goods-producing industries (manufacturing, construction and utilities) contracted 0.1 percent, while agricultural output increased 3.5 percent.
Exports Fall in September
Total exports fell 5.3 percent in September after increasing 3.0 percent in August. Manufactured-goods exports decreased 4.4 percent in September after rising 3.4 percent in August. Three-month moving averages show a steady decline in oil exports since May and flat-to-down activity in manufacturing and total exports (Chart 2). Consistent with the recent weakness, total exports were up only 1.7 percent through September compared with the same period in 2018 as manufacturing exports grew 3.0 percent but oil exports fell 16.2 percent.
Industrial Production Up in August; Manufacturing Down
Mexico’s industrial production (IP) index—which includes manufacturing, construction, oil and gas extraction, and utilities—grew 0.8 percent in August after decreasing 0.3 percent in July. The manufacturing index fell 0.4 percent in August after increasing 0.2 percent in July. The three-month moving average of total IP edged up after trending down since the end of 2018 (Chart 3). North of the border, U.S. IP declined 0.4 percent in September after increasing 0.7 percent in August. The correlation between IP in Mexico and the U.S. increased considerably with the rise of intra-industry trade following implementation of the 1994 North American Free Trade Agreement.
Retail Sales Inch Up
Retail sales grew 0.3 percent in August after stagnating in July. However, the three-month moving average continued its decline, dipping 0.1 percent in August (Chart 4). Nevertheless, retail sales are up 3.5 percent since December.
Employment Growth Bounces Back in September
Formal sector employment—jobs with government benefits and pensions—grew an annualized 3.6 percent in September, the same rate as the 10-year average (Chart 5). Formal sector employment growth had been below average since September 2018. Meanwhile, total employment, representing 54 million workers and including informal sector jobs, grew 2.1 percent in second quarter 2019, slightly above its 10-year average of 2.0 percent. The unemployment rate in September was 3.5 percent, up from 3.4 percent a year earlier.
Peso Rises Relative to Dollar in October
The Mexican currency averaged 19.3 pesos per dollar in October, up 1.5 percent from September (Chart 6). The peso has gained 4.2 percent against the dollar since December 2018 and is almost back to its 2018 average of 19.2 pesos per dollar. The Mexican currency has been under pressure due to increased uncertainty regarding U.S. trade policy and Mexico’s domestic policy.
Foreign-Owned Government Debt Dips Further
The share of peso‐denominated Mexican government debt held abroad fell to 28.4 percent in September. The three-month moving average decreased to 28.8 percent, its lowest level since early 2012 (Chart 7). The extent of nonresident holdings of government debt is an indicator of Mexico’s exposure to international investors, whose holdings could quickly reverse if they perceive a change in market sentiment.
Inflation Continues to Decline
The consumer price index (CPI) increased 3.0 percent over the prior 12 months in September, down slightly from 3.1 percent in August (Chart 8). CPI core inflation (excluding food and energy) rose 3.8 percent over the previous 12 months in September. Mexico’s central bank lowered its benchmark interest rate by 25 basis points for the second month in a row to 7.75 percent in September. The central bank cited slowing inflation, increasing slack in the economy and the recent behavior of external interest rates as the main reasons for the rate cut.
- Encuesta sobre las Expectativas de los Especialistas en Economía del Sector Privado: Octubre de 2019, (communique on economic expectations, Banco de México, October 2019).
About the Authors
Cañas is a senior business economist, and Smith is a research assistant in the Research Department at the Federal Reserve Bank of Dallas.