The struggles in Mexico’s industrial sector suggests that GDP fell by around 20% q/q in Q2. And the weak prospects for the sector will dampen Mexico’s economic recovery over the coming quarters.
- The struggles in Mexico’s industrial sector suggests that GDP fell by around 20% q/q in Q2. And the weak prospects for the sector will dampen Mexico’s economic recovery over the coming quarters.
- Having collapsed in April, Mexico’s industrial production fell by a further 1.8% m/m in May. That left output almost 30% below its February level. Mexico appears to be an outlier as most other major economies saw a partial rebound in output in May. (See Chart 1, comparing Mexico to the US and Brazil.)
- Output in Mexico fell in all major categories (mining, utilities, construction and manufacturing). Digging deeper, the main drag came from transport manufacturing, which was 80% below its February level. It’s possible that the reopening of auto factories in late May was not captured in the figures. But there also appears to be disruption to cross-border supply chains, which are especially important to the auto sector. Indeed, despite a pick-up in June, the auto industry is also lagging other sectors in the US. (See here.)
- On the bright side, the worst is probably over for Mexican industry. The latest vehicle export data suggest that transport manufacturing recovered around half of its annualised losses in June. (See Chart 2.) We estimate that alone would boost overall industrial production by around 4% m/m. The rise in the IMEF manufacturing index last month also suggests that output regained some lost ground. (See Chart 3.)
- Nonetheless, even if industrial production recovered as much as 50% of its losses in June, Mexico’s secondary (industrial) sector GDP would still have plunged by nearly 25% q/q over Q2 as a whole. (See Chart 4.) The primary and tertiary sectors are unlikely to have fared as badly but, given the sheer weakness of industry, we now think that Mexico’s GDP fell by 20% q/q in Q2 (-12.5% q/q previously).
- Looking ahead, the near-term prospects for the industrial sector are poor. The continued spread of Covid-19 in Mexico will hamper factory production, particularly if social distancing procedures are maintained or possibly tightened. Similarly, the renewed surge in virus cases in the US may lead to continued supply chain disruption, as well as weaker demand for Mexican manufactured goods.
- Overall, partly due to the bleak performance and outlook for industry, we now expect a below-consensus 10.5% fall in Mexico’s GDP in 2020 as a whole (-8.0% previously). We have pencilled in a 6% recovery next year, but that would still leave the level of GDP at end-2021 around 4% below its end-2019 level.
Chart 1: Ind. Production Level (SA, Feb. 2020 = 100)
Chart 2: Vehicle Exports & Transport Equip. Mfg (% y/y)
Chart 3: IMEF Manufacturing Index & Ind. Production
Chart 4: Industrial Production & Secondary Sector GDP*
Sources: Refinitiv, Capital Economics
Nikhil Sanghani, Assistant Economist, +44 (0)20 7808 4998, firstname.lastname@example.org