Economics: Economy extends slowing trend
The May 30 announcement by the president of the United States that it will impose a 5% tariff on all imports from Mexico effective June 5, with the possibility to raise it by an additional 5% each month until it hits 25% October 1, could have additional negative effects on the economy. It is very soon to know how long such import taxes will be levied and if they will reach the 25% peak the White House has threatened, but just the initial 5% could, in our view, shave close to 0.2 points off GDP, taking into account the peso depreciation, which partially offsets the impact of the tariff. We will be monitoring this situation as it unfolds and provide more detailed analysis as we get more information.
Economic news published last month offered further evidence of a stalling of activity, with several key indicators registering their worst results since Mexico entered into a deep recession during the second half of 2009. The revised GDP report for the first quarter contained some lows for the past decade, including the weakest seasonally adjusted uptick in GDP. While the service sector remains the economy’s main driver, its pace of growth slowed to a five-year low, and industrial activity continued to contract except for a weak rise in manufacturing.
More timely data reinforces the point as industrial activity fell for a fifth consecutive month in March, with that month’s 2.6% year-on-year drop the most pronounced such setback since November 2009. All four industrial components contracted, including manufacturing and utilities, which had sustained mostly positive results until now. March produced the first outright drop in factory activity in eleven months, with only four of 21 segments showing any gains, and many others experiencing high single or double-digit contractions.
Such results have led private sector analysts and multilateral international institutions to continue scaling back their GDP growth estimates for Mexico. Banco de México followed suit just this past week in its latest quarterly report on inflation, in which it lowered its growth forecast intervals and raised its inflation projections. It noted an accentuation of the economic weakness apparent in the previous quarter, and judged that the balance of risks to economic growth remains biased to the downside. In contrast, we at GEA stand by the calculation we made in early January that the economy will grow 1.4% this year.
Banxico was more nuanced on inflation risks, noting a continuing rise but also suggesting they reflect transitory pressures and that there is considerable slack despite significant wage gains.
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