Mexico’s economy softens in the second quarter

Mexico’s economic activity slowed in the second quarter of 2024, missing market expectations. GDP slowed to an annualized 0.8 percent growth from 1.1 percent the previous quarter due to a loss of momentum in services and an extended contraction in the agricultural sector. Recent data are mixed. While industrial production and retail sales ticked up, exports fell and employment growth stalled. Inflation accelerated further, and the peso fell against the dollar.

Market analysts were expecting twice as much growth for the second quarter. As a result, the consensus forecast for 2024 GDP growth (fourth quarter/fourth quarter), compiled by Banco de México, was down slightly in July (Table 1).

Output growth slows in the second quarter

Mexico’s second-quarter GDP grew an annualized 0.8 percent (Chart 1). On a nonannualized basis, the goods-producing sectors (manufacturing, construction, utilities and mining) expanded 0.3 percent after contracting 0.4 percent the previous quarter. Activity in the services-providing sectors (wholesale and retail trade, transportation and business services) grew 0.3 percent, slower than the previous quarter’s 0.7 percent increase, and agricultural output fell 1.7 percent.

Industrial production rises

The three-month moving average of Mexico’s industrial production (IP) index, which includes manufacturing, construction, oil and gas extraction, and utilities, rose 0.2 percent in June. The smoothed manufacturing IP index ticked up 0.2 percent (Chart 2). North of the border, the smoothed U.S. IP index climbed 0.5 percent in June after rising 0.2 percent in May.

Exports tick down in June

The three-month moving average of total Mexican exports declined 0.6 percent month over month in June. Exports of the much larger manufacturing sector fell 0.8 percent while oil exports dropped 1.2 percent (Chart 3). Year to date through June, total exports were 0.9 percent lower compared with the same period in 2023, with manufacturing exports down 0.6 percent and oil exports down 8.5 percent.

Retail sales grow in May

The three-month moving average of real retail sales increased 0.2 percent in May, the latest data available (Chart 4). Year over year, the smoothed retail sales index was up 0.6 percent as household spending continues benefiting from formal job creation and generous minimum wage increases.

Payroll growth stalls

Formal sector employment, meaning jobs with government benefits and pensions, edged up 0.2 percent annualized (3,125 jobs) in June, after growing at a below-trend rate in May (Chart 5). Total employment, representing 59.1 million workers and including informal sector jobs, was up 1.1 percent year over year in the first quarter. The unemployment rate ticked up to 2.7 percent in June.

Peso falls sharply in June, stabilizes in July

The Mexican currency averaged 18.1 pesos per dollar in July, after decreasing 7.8 percent in June (Chart 6). However, the peso has been under pressure recently and weakened to an average of 19.0 pesos per dollar during the first week of August as U.S. recession fears added to the uncertainty regarding the U.S. presidential election and how its outcome could affect U.S.–Mexico trade.

Remittances to Mexico spike in June

The three-month moving average of real remittances to Mexico increased 11.6 percent in June after falling 4.6 percent in May (Chart 7). However, the U.S. economy is expected to experience slower employment growth this year, which may impact the capacity of Mexicans working abroad to send money back home.

Inflation moving in the wrong direction

Mexico’s consumer price index (CPI) increased 5.6 percent in July over the prior 12 months, stronger than the 5.0 percent reading in June (Chart 8). The main reason behind the acceleration in inflation was higher fruit and vegetable prices, which rose 23.3 percent in July. Widespread drought in Mexico has contributed to the increase in fruit and vegetable prices. In addition, energy prices increased 9.2 percent. On a positive note, CPI core inflation, which excludes food and energy, slowed to 4.1 percent; however, services, which are part of core CPI, remained around 5 percent.

Despite rising inflation, Mexico’s central bank lowered its benchmark rate by 25 basis points to 10.75 percent in August. This is the second rate cut this easing cycle following a 25-basis-point reduction at the bank’s March meeting. In its statement, the bank explained the move by stating there is a risk of slower growth in economic activity and the recent price hikes were limited to more volatile sectors such as energy and food.