Mexico economy slowing down further in Q3

Mexico economic activity has surprised on the upside in recent months considering the slowdown in industrial production. However, the recent trade and IP numbers put supply side growth close to 2.1% yoy in August. Based on the assumption of slight acceleration in September of 2.4%, we still get a supply side growth deceleration in Q3 of 2.1% yoy and a 1.6% qoq annualised rate (2.3% and 2.5% respectively in Q2). On a trend basis, therefore, growth continued to decelerate in both Q2 and Q3 and brings significant downside risk to the 2015 growth forecast of 2.3%. 

In terms of the industrial production details, the bulk of the weakness was caused by the falling mining production on lower oil production while the manufacturing sector appears stronger than other components (with the exception of the June figure). These numbers are in sharp contrast to demand side indicators such as private consumption, which is showing significant growth acceleration this year. Not only does this mismatch raise doubts about recent growth numbers, but it also raises the scope for significant forecasting errors. 

Recent weakness aside, the IP improvement since last year has largely been driven by strengthening US growth and a jump in vehicle exports. Mexico's real export growth has surged impressively on average. The improvement in the competitiveness of exports - and, therefore, stronger investment growth - was achieved via lower wage growth in a weak labour market and should be helped by the weakening peso. 

Stronger manufacturing and trade gains are expected in Q4 15 and in 2016, boosting the rest of the economy via the investment, employment, wage and sentiment channels. Improvement in IP growth through the remainder of this year should help the economy grow to its potential in Q4 15 and then to strengthen in 2016. Currently, the Mexican economy is expected to grow by 2.3% in 2015 and 3.1% in 2016. However, there are some downside risks to these numbers.