The increase in the Mexican IMEF manufacturing index last month suggests that the industrial sector has continued to benefit from stronger demand in the US, points out Capital Economics.
But while the Mexican industrial sector should continue to perform well in the short-term, growth looks set to slow next year as external demand from the US weakens.
Data released this week show that the IMEF manufacturing index rose to 54.1 last month, from 52.7 in February. That leaves the overall reading far above 50, which is the notional divide between expansion and contraction.
Looking at the detail, the production component rose to 59.4 last month (from 54.9 in February) – its strongest level since November 2006. Perhaps even more promisingly, the new orders balance increased to 58.8 (from 55.4), which suggests that the pick-up will be extended into April.
The one disappointment in an otherwise very positive survey was the drop in the employment index to 51.4 (from 52.1 in February). Although the reading is still above the crucial 50-mark which suggests that firms are still hiring, the bigger picture is that the labour market remains soft.
Overall, the survey suggests that industrial production growth remained strong following the 1.4% m/m increase in January. But the relationship between the IMEF survey and the actual industrial production data is not particularly convincing.
In this respect, the really good news is that the positive tone of the IMEF survey was supported by last week’s US ISM manufacturing index, which is a much better leading indicator of Mexican industrial production growth.
Although the headline index dipped to 61.2 in March, it was down only slightly from 61.4 in February (which itself was the highest reading since May 2004). With Mexican industry well integrated into US supply chains, stronger demand has quickly fed through to industry south of the border.
At its current level, the ISM index indicates that industrial production expanded by 1-1.5% m/m in both February and March and that annual growth will head towards 10% over the coming months.
Accordingly, having broadly stagnated in the second half of last year, it appears that industry probably made a significant contribution to GDP growth in Q1.
Looking further ahead, demand from the US should remain strong in the near-term and Mexican industry, and therefore the economy, will perform correspondingly well. Indeed, Capital Economics have pencilled in overall GDP growth of around 4.3% this year.
Nevertheless, Capital Economics continue to expect the US economy to slow next year. As a result, in the absence of any additional measures to bolster US demand next year, Mexican industry may stagnate again for much of 2012. Accordingly, a key prop to Mexican growth will be removed and although domestic demand looks set to improve further this year, we still expect GDP growth to slow to 3% or so.
The upshot is that while policymakers at the central bank have become increasingly hawkish in recent weeks, we still think that it is too soon to begin raising interest rates and we expect them to stay on hold at 4.5% until next year.