Economic Growth in Mexico and in Peru

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).

image001_46.gif 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.

image002_110.gif 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).

image003_21.gif 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).

image004_73.gif 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.

8 Responses to "Economic Growth in Mexico and in Peru"

  1. Jaime B   February 18, 2009 at 6:17 pm

    How can Mexico lower rates if food inflation remains close to 9%? Wouldn’t it put even more pressure on the Peso and increase already huge derivative problems in Mexico?I wondered if you’ve written something about how the Obama “Buy American” campaign could affect Mexico or whether there is any reason to be positive about the near term outlook on the country?My main worry is that rising economic problems in Mexico will lead to populist movements as in Brazil, with intervention in the financial markets (the PRI yesterday was blaming “foreign banks operating in Mexico”) and I’m not sure if nationalisation is still possible in the region.Good post by the way.

    • ADVILL   February 20, 2009 at 4:47 am

      Mexico public finances are stable and no goverment money is being applied to restore financial minimums in banks, all the contrary, THE FOREIGN BANKS HAS TAKEN (CITI, SANTANDER HSBC ETC.) THE CAPITAL OF THE MEXICAN BRANCHES TO SUPPORT THEIR HQ.´s….and mexican banks are still there.Mexico is applying the “all the medicine in one step” all the bad news will be concentrated in the first half of the year and then we´ll see how US is reacting.Mexico has extraordinary opportunities in the future with car industry (if correct moves are on, GM and FOrd can move a hugh volume to north of Mexico.) Mexican T-bonds are sound and will be demanded, public investments in infrastructure will benefit the long term.Mexico has other problems…very bad problems but not in public finances or banks.

  2. WG   February 18, 2009 at 10:27 pm

    I think the prediction in the case of Peru might be a bit more on the pessamistic side (3.75 to 4.75) unless ofcourse it’s not taking in to account all of the heavy infrastructure investments that the Peruvian goverment is embarking upon to maintian the GPD growth numbers above 5%. If indeed the forcast did not take that in to account then it might be accurate. But the Peruvian goverment has stated even recently that it has set aside over $20 Billion US, to keep growth levels above 5% for 2009 and well in to 2010. The extent of the infrastructure projects that the government is embarking upon are on a scale never before seen in Peru, which in turn will have a dramatic effect on the Peruvian economy from there on, since many of these projects will allow Peru to be a net energy exporter as well as allow for a dramtically improved competativeness on the world market due to enhanced transportation, shipping, and low rate loans to small, medium, and large enterprizes within the country. In addition to all of this Peru is set to sign (or already signing) free trade agreements with 16 more countries of the world, several of which are HUGE markets for Peruvian goods, such as India, China, Japan, South Korea, these are heavy hitters and will have a dramatic effect on Pervian exports, even in the current world situation, since many of the Peruvian exports are already highly competative in nature, but also the import market for Peru will be just as important for internal growth of the country. Having access the Indian, Chinese, Korean, Japanese sources for needed domestic growth will allow for a new boom in the domestic Peruvian market.

  3. GVC   February 19, 2009 at 1:27 am

    I fully agree with WG. The prediction of Peruvian GDP growth is too pessimistic. We cant forget that the projects would total 2.5% of GDP (at current prices) and that the potential output of Economy (i.e. growth without generating pressure in inflation) is already above 6%.In any case, I believe the 4.7 corresponds not to a base scenario, where the world stays as it is. It rather corresponds to a world that goes deeper into recession.

    • Perico Candela   February 20, 2009 at 10:38 am

      I agree with RGE’s pessimistic prediction as there will be considerable delays in the implementation of Garcia’s Anticyclical Plan. Remember, the Peruvian Government is very inefficient, even at the regional and municipal levels. So, at the end, RGE’s predictions might even be too optimistic.

  4. Javier   February 20, 2009 at 11:39 am

    Can the tandem, the wagons and the caboose go faster than the engine? Don’t make me laugh! because it still hurts…

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