Industry slowdown, fuel shortages could hit Mexico Q1 GDP

Monday, February 11, 2019

Industrial production in Mexico showed a 2.5% year-on-year contraction in December, according to statistics agency Inegi, significantly lower than estimates as evidence mounts that industry has carried weakness into 1Q19.

Local lender Banorte pointed out in a research note that the figure was much worse than its prediction of -1.8% and the -1.6% consensus estimate.

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"The surprise contraction in Mexican industrial production in December means that the sector was weaker over Q4 as a whole than we (and probably the statistics office) thought," said Edward Glossop, Latin America analyst at research firm Capital Economics. "As a result, there's a good chance that the preliminary Q4 GDP growth figure of 0.3% quarter-on-quarter will be revised down," suggesting the final estimate, out February 25, could be end up being 0.1%-0.2% q-o-q.

Banorte agreed with the possibility of a lower 4Q18 GDP result and added, "We believe that industrial activity is limited on the upside and is likely to remain weak at least in 1Q19 due to the slowdown in global manufacturing and commercial activity as well as in local supply chains."

The commercial uncertainty continues, with the market focused on negotiations between the US and China, which in case of failure to reach an agreement could result in additional costs as early as March 1, Banorte said.

"On the other hand, other indicators based on surveys have not shown an additional deterioration, such as business confidence [from Inegi], the [Mexican finance executives association] IMEF manufacturing [index] and the US ISM in January," said Banorte. "In this sense, although it is very likely that industrial activity remains weak at the beginning of 2019, the conditions of domestic demand continue to be relatively favorable, particularly in terms of private consumption, which will help to establish a floor for the performance of the activity industrial after the fading of the recent temporary shocks."

GDP hit by fuel shortages, blockades

Banorte also warned of the potential impact on GDP from government efforts to halt fuel theft - causing shortages - and recent railroad blockades carried out by workers in the state of Michoacán.

The issues, which also carry risks to variables like unemployment, could hit GDP by as much as three-tenths of a percentage point this year, according to Mexican economics studies think tank CEESP.

Economic costs accumulated so far are important and could be maintained for much of the year given the time it takes to reverse them, which reinforces the expectation that the economy will grow below 2% this year, said CEESP in a weekly report.

Commenting on other policies from the administration of President Andrés Manuel López Obrador (AMLO), CEESP said new programs that distribute public resources, mainly assistance programs, do not translate into economic growth, while those involving investment in infrastructure can have a direct impact as stimulus for private investment and employment generation, as well as increasing the tax base.

AMLO's efforts to eliminate corruption, cancel the new Mexico City international airport, implement a new energy policy related to state-owned giant Pemex, as well as the cancellation of electricity auctions and a review of mining concessions, are all combining with the fuel shortages and rail blockades to generate weak GDP growth in the first part of the year, said CEESP.

Pictured: People buy gasoline last month at a gas station in Morelia, Michoacan state, one of several states where shortages have been reported.