Economics: Data released in July shows weakening growth while global slowing casts a pall
Inegi’s preliminary estimate of second quarter GDP showed the economy continuing to cruise along at roughly the same pace as it did between January and March. The report shows continuing gains in the agricultural and service sectors but especially the secondary sector, which despite setbacks in its construction and mining components has been powered by manufacturing, which has mainly benefitted from continuing US demand for Mexican goods. In fact, the export sector and, more specifically, manufacturing have been the only catalysts not only of economic growth in general but also of both employment and remunerations paid. But they now face a high-risk horizon given the increasing signals pointing to a slowing of the US economy, and there is little evidence that the domestic economy can offset any weakening on the export front.
Already, labor market data give pause. Despite continuing strength in formal sector employment and pay, both remain considerably below pre-pandemic levels in the service and construction industries. The percentage of those working in what Inegi defines as critical conditions of employment—including those working less than 35 hours a week while making less than a minimum wage or more than 48 hours while earning no more than two minimum wages—has more than doubled since the first quarter of 2018.
The horizon is becoming more negative in many respects. Just last week we received evidence that private consumption and gross capital formation declined during May on a monthly basis according to seasonally adjusted data. The private consumption headline reading showed a sequential 0.4% contraction for May as consumption of domestic goods slipped 1.1% while that of imported goods climbed 0.6% above April levels. Following the same trend, gross capital formation fell in May by a troubling 1.2% compared to April due to declines in both the construction (-2.7%) and machinery and equipment (-1.0%) components.
Given the prospect of a US slowing or recession and the high inflation that has taken a real-term bite out of the spending of households in Mexico, we estimate that GDP growth will begin to taper off during the next two quarters, with annual growth expected at 1.3% in the third quarter and 0.7% in the fourth.
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