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Mexico’s Economic Growth Continues; Outlook Remains Unchanged

Jesus Cañas and Juliette Coia

July 7, 2022

July 2022 Economic Report
GDP, real
January–March '22
(revised estimate)
Employment, formal
May '22
CPI
May '22
Peso/dollar
May '22
4.1% q/q 107,000 jobs m/m 7.6% y/y 20.1

Mexico’s first-quarter economic growth was better than previously estimated as the second estimate of GDP was revised up to an annualized 4.1 percent from the initially reported 3.6 percent. In addition, Mexico’s proxy for monthly GDP growth averaged 0.4 percent during April and May. However, deceleration in global economic growth, ongoing supply-chain bottlenecks, higher inflation and tighter monetary policy remain headwinds for the Mexican economy. The consensus forecast for 2022 GDP growth (fourth quarter/fourth quarter), compiled by Banco de México, remained unchanged in May (Table 1).

Table 1: Consensus Forecasts for 2022 Mexico Growth, Inflation and Exchange Rate

  May April
Real GDP Growth (Q4/Q4)

2.1

2.1

Real GDP (average year/year)

1.8

1.7

CPI (Dec. '22/Dec. '21)

6.8

6.8

Exchange rate—pesos/dollar (end of year)

21.0

21.1

NOTE: CPI refers to consumer price index. The survey period was May 24–30.
SOURCES: Encuesta sobre las Expectativas de los Especialistas en Economía del Sector Privado: Mayo de 2022 (communiqué on economic expectations, Banco de México, May 2022).

The latest data available show exports, employment and retail sales grew, while industrial production and remittances declined. In May, the peso gained value against the dollar, but inflation remained elevated.

Economic Activity Expands

Growth in the global economic activity index (IGAE) —the monthly proxy for GDP growth—was 0.1 percent in May and 0.8 percent in April (month over month), a slight acceleration from the previous two months on average (Chart 1). The pickup in activity was mainly due to the goods-producing sector (including manufacturing, construction and utilities), which increased 15.1 percent in April and 0.1 percent in May. Service-related activities (including trade and transportation) fell 11.8 percent in April but grew 0.7 percent in May. On a year-over-year basis, IGAE rose 1.0 percent in May and 1.3 percent in April.

Chart 1

Industrial Production Slows

The three-month moving average of Mexico’s industrial production (IP) index—which includes manufacturing, construction, oil and gas extraction, and utilities—dipped in April from March even as manufacturing production rose (Chart 2). On a month-over-month and unsmoothed basis, IP was down 0.1 percent in April. North of the border, U.S. IP increased 0.7 percent in May after rising 1.0 percent in April. The correlation between IP in Mexico and the U.S. increased considerably with the rise of intra-industry trade between the two countries since the early 1990s. Mexico’s manufacturing sector could experience some slowdown in the second quarter, particularly if U.S. consumer demand decelerates as a result of rising prices and higher interest rates.

Chart 2

Export Growth Accelerates in April

The three-month moving average of total Mexico exports increased 3.4 percent in April as oil exports grew 12.0 percent, and the much-larger manufacturing exports category grew 2.9 percent (Chart 3). On a month-over-month and unsmoothed basis, total exports increased 0.5 percent in April, with oil exports growing 9.1 percent but manufacturing exports falling 0.4 percent. The pickup in oil prices has contributed to the recent growth in oil exports given that Mexico’s oil production has been flat since mid-2021. Mexico’s total real monthly exports in April were 13.8 percent above prepandemic levels (February 2020) and 11.1 percent higher than year-ago levels (April 2021).

Chart 3

Retail Sales Continue to Climb

The index of real Mexico retail sales increased 0.8 percent month over month based on a three-month moving average through March (Chart 4). On a month-over-month and unsmoothed basis, retail sales grew 0.4 percent in March. Retail sales reached prepandemic levels (February 2020) in October 2021.

Chart 4

Above-Trend Payroll Gains Continue

Formal sector employment—jobs with government benefits and pensions—grew an annualized 6.3 percent (107,000 jobs) in May after increasing 6.1 percent in April (Chart 5). Year-over-year employment growth was 4.5 percent in May. Total employment, representing 56.1 million workers and including informal sector jobs, was up 5.9 percent year over year in first quarter 2022. The unemployment rate in April was 3.1 percent, down from 3.4 percent in March. Employment in Mexico recovered to prepandemic levels in September 2021, although the GDP remains 1.1 percent below its prepandemic level.

Chart 5

Peso Strengthens in May

The Mexican currency averaged 20.0 pesos per dollar in May, up slightly from April (Chart 6). However, the peso is still down 5.9 percent from its prepandemic level in February 2020. The peso has been under pressure due to high inflation and increased uncertainty regarding domestic and global growth.

Chart 6

Remittances to Mexico Decline Further

The three-month moving average of real remittances to Mexico decreased 0.4 percent in April after falling 2.3 percent in March (Chart 7). However, on a month-over-month and unsmoothed basis, remittances increased 2.8 percent in April. Most likely, remittance flows to Mexico are slowing due to high inflation in the U.S. and elsewhere, which erodes disposable income, including funds for remittances. Remittances to Mexico peaked in November 2021. Record transfers of $50 billion in 2021 can be attributed to depreciation of the peso between February and April 2020 as well as Mexican migrants abroad sending more money to help relatives buy food or cover basic expenses during the pandemic.

Chart 7

Foreign-Owned Government Debt Share Continues Downward Trend

The three-month moving average of foreign‐owned Mexican government securities decreased to 17.4 percent in May, down 1.5 percent from its April value (Chart 8). The extent of nonresident holdings of government debt is an indicator of Mexico’s exposure to international investors and a sign of confidence in the Mexican economy. It’s noteworthy that the measure has been on a downward trend since peaking in early 2015.

Chart 8

May Inflation Highest Since 2001

Mexico’s consumer price index (CPI) was up 7.6 percent in May over the prior 12 months, rising at the same rate as in April (Chart 9). CPI core inflation (excluding food and energy) rose 7.3 percent in May over the previous 12 months. In June, Mexico’s central bank increased the benchmark interest rate to 7.75 percent, hiking it by 75 basis points—the largest rise since 2008. In the public announcement accompanying the interest rate decision, the central bank cited several factors for the increase, including persistent global and domestic inflationary pressures associated with the pandemic; increases in energy, agricultural and livestock product prices; the intensification of geopolitical turmoil; and strict lockdown measures imposed by China. In addition, the central bank said it intends to continue raising the reference rate if inflationary pressures persist.

Chart 9

About the Authors

Jesus Cañas

Cañas is a senior business economist in the Research Department at the Federal Reserve Bank of Dallas.

Juliette Coia

Coia is a research analyst in the Research Department at the Federal Reserve Bank of Dallas

The views expressed are those of the authors and should not be attributed to the Federal Reserve Bank of Dallas or the Federal Reserve System.

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