Economics: Prospects dim for a key driver of recovery as manufacturing demand is expected to soften on main fronts

MEXICO - Report 31 May 2022 by Mauricio González and Francisco González

As the only GDP component to boast a significant recovery, manufacturing has contributed greatly to the economic reactivation in Mexico. Most manufacturing subsectors have enjoyed strong growth in recent quarters even as some especially crucial industries that acted as drivers during some of the toughest times of the pandemic, such as the automotive sector, have been tripped up by scarcities in key inputs.

As services and much of the broader industrial sector continue to struggle, operating well below pre-pandemic levels, during the first quarter most branches of manufacturing continued to expand on an annual basis, with some even advancing at a pace in the low double digits. But the March report on industrial activity hints at potential problems to come as manufacturing production proved lower than in February, with 13 out of 21 manufacturing subsectors contributing to that seasonally adjusted decline. We believe the factors underpinning that weakening could increasingly make themselves felt in the coming months and potentially further erode Mexico's economic growth expectations.

Further clouding the outlook is the extent to which analysts have been steadily scaling back their GDP estimates for the US. A number of them insist that the current context of rising inflation and increasingly stringent monetary policies will not only slow GDP growth but also lead to an outright recession in the United States, which would further weaken demand for the sorts of Mexican goods produced largely for the export market. Nor do we anticipate a reactivation of manufacturing sectors focused on the domestic market as domestic consumption remains constrained given the limited extent of wage growth, something apparent in the continuing weakness of the service sector.

While manufacturing has achieved significant rates of growth on an annual basis, especially in a number of key subsectors, most continue to produce at levels far below those of early 2019, and the factors that have weakened the sector in recent months are expected to become more pronounced in the short term.

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