INEGI reported that economic activity (IGAE) shrunk by 2.7% y/y in November (4.1% y/y in Nov 07 and 0.3% y/y 3MMA), thus, bringing economic growth to a sluggish performance of 1.5% YTD (3.2% YTD in 11M07). The result was worse than our expectation (-2.1% y/y) and that of the consensus (Bloomberg -1.5% y/y).
Services contracted sharply (-1.8% y/y vs. 1.4% y/y 3MMA); however, the volatile agricultural sector printed a marginal growth (2% y/y vs. -0.3% y/y 3MMA). As indicated last week by INEGI, Industrial output fell rapidly (-5.4% y/y vs. –2.1% y/y 3MMA). Adjusted for seasonal factors, IGAE declined by 0.7% m/m (0.6% m/m in Oct) on the back of worsening dynamics in industrial output (-0.9% m/m vs. 1.5% m/m in Oct) and services (-0.3% m/m vs. -0.2% m/m in Oct). However, agriculture expanded strongly (2.9% m/m vs. -4.5% m/m in Oct).
As stated before, the deepening of the US recession and the external shock, coupled with poor domestic demand dynamics, dragged Mexico’s economic activity deeper into negative territory. Moving forward, on top of worsening US data, Mexico’s numbers for December, especially on total trade, consumer confidence, auto production and sales, labor dynamics, lending, and oil output, suggest that the ongoing decline in economic activity likely intensified. Although in the last QIR, Banxico anticipated GDP to expand by 1.5% in 2008 and our forecasts suggest 1.3%, the current data point to a somewhat lower growth. In 2009, we maintain our forecast at -1.7% y/y (-1.5% to -2.5% range), which is somewhat in line with the CB expectations of a contraction between -0.8% to -1.8%. In terms of monetary policy, the rapid widening of the output gap and expected disinflation process in the upcoming months bode well with our view that Banxico will lower rates to about 6% by mid-year (50bps in Feb and March, and 25bps in April, May and June). Further monetary policy accommodation might be necessary, especially in the 2H09, if growth dynamics and expectations do not improve and inflation moves faster and closer towards the 3% target range.