Strong spending by Mexican consumers drove an acceleration in Latin America’s second-biggest economy in the final months of last year but a fall in manufacturing raised concerns about resilience in a key export sector.
Mexico’s economy grew twice as fast in the fourth quarter as in the third with an expansion of 0.8 per cent quarter-on-quarter, the national statistics agency said on Monday, beating expectations in a Reuters poll for 0.6 per cent growth.
But although full-year growth of 3.9 per cent matched 2011’s rate, fourth-quarter growth compared to a year earlier came in at 3.2 per cent, missing expectations for a 3.57 per cent rise.
The economy is seen losing steam in the first half of 2013 amid fears U.S. tax hikes and spending cuts will sap demand for Mexican exports, which had been supporting growth.
The figures showed manufacturing output fell in the fourth quarter for the first time since 2009, when Mexico was battered by a deep recession. Growth was instead driven by an expansion in services, which make up two-thirds of economic output and are seen as a litmus test for domestic demand.
Services have grown in importance over the last five years and some analysts think planned structural reforms will help boost incomes and access to credit and unleash more spending.
“All of the recovery since 2008, 2009 has really been in industrial exports and ... consumer spending has sort of lagged behind, but now it’s almost a role reversal which is helping to sustain growth,” said David Rees, an economist at Capital Economics in London.
Rees projects growth of 3.5 per cent this year, in line with government expectations, on strong domestic demand and a pick-up in industry in the second quarter, helped by robust U.S. factory activity last month. Most of Mexico’s exports go to the United States and factory activity is closely linked.
But some analysts were not so sanguine. Banco Santander economist Rafael Camarena said industrial weakness supported bets for a benchmark interest rate cut, something the central bank warned last month it might pursue if inflation continues to cool and economic growth slows.
“We’re seeing a slower economic expansion rate and low inflation, which creates a window of opportunity for the central bank to make this cut,” said Camarena, who expects a 50-basis-point cut at the bank’s March meeting.
Markets are pricing in a 64 per cent chance of a 25-basis-point cut in March to the central bank’s 4.50 per cent benchmark rate and have fully priced in such a cut by April.
SERVICES SAVING GRACE
The figures showed industry contracted by 0.21 per cent in the fourth quarter. The services sector expanded 0.68 per cent while agricultural activity grew 2.09 per cent.
Industrial production posted its biggest monthly drop since 2009 in December as Mexican factory managers burned through inventories amid uncertainty about U.S. budget tightening that was due to start at the start of 2013.
U.S. lawmakers managed to avert across-the-board tax hikes, but they could still fail to reach an agreement on spending cuts that could drag on growth, and that uncertainty may cast a pall over manufacturing during the first part of this year.
Construction in Mexico also fell in the fourth quarter as public infrastructure spending dried up at the end of former President Felipe Calderon’s term, hitting companies such as cement maker Cemex, whose fourth-quarter local sales missed expectations.
But strong spending on transport, real estate and financial services helped pick up the slack.
Confidence about Mexico’s internal market drove billionaire Carlos Slim to take retailer Sanborns public this month, raising almost $1-billion.
Mexican retailers are eyeing 5 per cent growth in 2013 on continued strength in department store sales and consumer optimism, which dipped in January off a nearly five-year high.
Mexico’s second-biggest retailer Soriana has said it is planning to invest 4.6 billion Mexican pesos ($362.69-million U.S.) to open about 60 new stores and boost its land reserves for development of future facilities.
“We’re very positive about this year, just like last year. I think that Mexico is ready to grow and generate more jobs,” Soriana CFO Aurelio Adan told Reuters in an interview last month.
Separate data showed economic activity slumped in December, after relatively strong expansion in the previous two months.
Mexico’s IGAE indicator fell 0.99 per cent in the month, its biggest fall in almost three years, dragged down again by the industrial sector. Activity was up just 1.42 per cent from December 2011.