Mexico's industrial growth modest despite decent manufacturing growth

Trade data suggests that Mexico's industrial production likely grew by 1.4% yoy as manufacturing continued to expand at the decent pace of 3.9% yoy, although the mining sector decline continues to be a significant drag and construction sector growth has also slowed. The key take away from the breakdown by sector is that while the manufacturing sector is growing at a faster pace thanks to strong US growth, domestic demand remains depressed and has affected growth in other sectors. It remains to be seen whether the impressive growth in the manufacturing sector can pull up other sectors - although mining activities could remain depressed for a long time given energy prices and the weak investment in this sector. Based on the July assumption, the six-month average for IP growth remained close to 1% yoy, a depressing level.

Recent weakness apart, the IP improvement since last year has been largely driven by strengthening US growth and a jump in vehicle exports. Mexico's real export growth has surged impressively. 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. 

"We continue to expect stronger manufacturing and trade gains in H2 15, boosting the rest of the economy via the investment, employment, wage and sentiment channels", says Societe Generale.

Given the most recent US economic data releases, it is believed that the slowdown in Mexican industrial production may be temporary. Improvement in IP growth through the remainder of this year should help the economy to grow to potential in H2 15 and then to strengthen in 2016.