Mexico to post robust growth outlook despite global woes

The Mexican economy continues to grow modestly, having been below the long-term growth rate average of around 2.6% since 2013. Falling oil prices have affected mainly the trade balance and the oil-dependent part of fiscal revenues, but they do not imply a deep crisis like in other commodity-dependent Latin American countries.

The government has hedged most of its oil-related revenues and has announced spending cuts to keep the fiscal deficit in check. A fiscal reform launched in 2013 is expected to reduce the dependence on oil as a source of fiscal revenue.

Mexico's close ties to the US, strong fundamentals and the lion's share of exports - about 80% - being driven by manufacturing, set the stage for growth despite China worries and low commodity prices.

The second quarter saw a slight pick-up in growth of 2.2% y/y, but weaker-than-expected growth in the US and decreasing oil production continue to hold industrial production down. Domestic demand should start to pick up in 2016, as declining unemployment, firm job creation, solid remittance growth, low inflation and steady credit growth create a favourable basis for private consumption. However, confidence is weak and remains a major obstacle to a take-off in domestic demand.

Improving public security and strengthening institutions will thus be important to sustain investment, increase competitiveness and ensure long-term growth.

"We expect growth of around 2.5% in 2015 and 2016, up to 3.0% in 2017, as the benefits from the reforms start to materialise. A weaker MXN, a pick-up in US economic activity and progress in domestic demand will be the drivers. Downside risks to growth stem from weaker-than-expected US industrial production, an additional drop in oil prices and a failure of confidence indicators to pick up", says Nordea Bank.