MEXICO—Severe Slowdown in Industrial Production
Industrial production declined sharply by 6.7% y/y in Dec. 08 (-3.3% y/y 3MMA), meaning that the industrial sector contracted by 1.3% y/y in 2008 (+2.5% in 2007), according to INEGI. The result was worse than expectations (ours -6% y/y; Bloomberg -5.7% y/y; Reuters -4.8% y/y). Adjusted for seasonality, industrial output fell by 4.7% m/m in Dec. (-1.1% m/m in Nov), thus bringing industrial output deeper into the red for the fourth consecutive quarter to -2.75% q/q SA in 4Q08 (-1% q/q SA in 3Q08).
All sub-sectors contracted swiftly: manufacturing (-6.6% y/y), mining (-6.7% y/y), construction (-7.1% y/y), and utilities (-5.3% y/y). Poor results in transport, computer, communication and electrical equipment, largely impacted by the deepening recession in the US industrial production, harshly impacted Mexico’s manufacturing output. Moreover, the ongoing decline in Mexico’s oil output kept mining in negative territory, and continuing declines in the housing and non-housing construction pushed that sector deep into the red.
As we have stated before, the deepening of the global economic deceleration, especially in the US and Europe, together with slowing domestic real lending growth, waning consumer and business confidence, and increasing unemployment, should have weighted on economic activity in December (-2.8% y/y). Furthermore, a sharp decline in total trade volume (exports plus imports, -16% vs. 0% y/y 3MMA) likely added downside pressures to GDP by the end of last year. In these conditions, we anticipate GDP to have contracted by around 2% y/y in 4Q08 (4.3% y/y in 4Q07), therefore, bringing economic growth to a shy 1.2% y/y in 2008 (3.2% y/y in 2007). Finally, since leading indicators for Jan. 09 continue worsening, especially Mexico’s auto data, it is highly likely that January’s industrial production went down by two digits (-13% y/y) and exerted strong downside pressures on economic activity at the beginning of the 2009 (-2.5% to -3% y/y in 1Q09).
In terms of monetary policy, the rapid widening of the output gap and improving inflation dynamics will likely induce the CB to slash the ON TIIE rate by 50bps to 7.25% by the end of the week. A more sizable cut, however, is limited by the strong weakening pressures on the MXN.
PERU—Economic Growth Decelerated Rapidly in December
On Monday, INEI reported that economic activity decelerated to 4.9% y/y in December (10.1% y/y in Dec 08 and 9% y/y 3MMA), which implies that the economy expanded by 9.8% y/y in 2008 (8.9% y/y in 2007). Of importance, INEI revised up monthly GDP growth data so the accumulated growth for 2008 was above expectations. The December outcome was in tandem with expectations (ours 4.7% y/y; Bloomberg 4.7% y/y).
As anticipated, the most important sectors lost steam rapidly: commerce (4.2% y/y vs. 12% y/y 3MMA), manufacturing (3.8% y/y vs. 4.8% y/y 3MMA), mining (3.4% y/y vs. 7.4% y/y 3MMA), import taxes (7.4% y/y vs. 12.4% y/y 3MMA), and other services (3.9% y/y vs. 7.4% y/y 3MMA). Construction expanded at a healthy pace, although it showed signs of exhaustion (10.3% y/y vs. 14% y/y 3MMA).
As we have expressed for some time, the unfriendly global growth outlook and tighter financial conditions, coupled with a high statistical comparison base in 1H08 (11.1% y/y), lower commodity prices and a cyclical domestic slowdown, should maintain GDP growing at a subdued pace. However, accommodating macroeconomic policies should add support to economic activity. In this context, we maintain that in the best case scenario, Peru’s economy will likely expand by 4.6% y/y in 2009 (3.75% to 4.75% range). Our forecast includes a sharp deceleration during the 1H09 to 3% – 4% y/y and an improvement the 2H09. If external conditions do not improve in the 2H09, GDP growth will most likely reflect our 1H09 expectations.