Mexican economy sees sharpest contraction since May 2020

Mexico’s economic data for August widely disappointed, with statistics agency Inegi reporting 4.3% year-on-year growth in its monthly IGAE indicator and a month-on-month contraction of 1.6%. 

It was the worst monthly reading for the GDP proxy since May 2020 and the annual growth figure was far off the consensus forecast of 6.4%.

“The annual reading of the IGAE continues to reflect an economic slowdown,” Ramsé Gutiérrez, vice president and portfolio manager at Franklin Templeton México, told BNamericas.

Looking at the seasonally adjusted data, IGAE expanded 3.8% y-o-y in August compared to growth rates above 20% in April and May, he added.

Gutiérrez said the 1.6% monthly decline was “well below the consensus expectation for an 0.2% expansion, and as such the [preliminary 3Q21] GDP growth to be published Friday could be lower than expected.”

The unexpected weakness in the August data “appears to be strongly influenced by the tertiary sector [services]”, which declined 2.5% on a monthly basis, he said.

Professional, scientific and technical services have been “falling significantly” for three consecutive months, falling 7% in June, 10% in August and 31.4%, respectively, Gutiérrez added. 

In a research note, Mexico’s Banco BASE said the degree of the declines in these areas have not been seen since 1993.

The negative IGAE reading lead the bank to reduce its 2021 forecast range from 5.8-6.7% to 5.4-6.2%, Gabriela Siller, head of economic analysis, confirmed to BNamericas.

Fellow local bank Banorte also came out with a research note, saying: “Today’s report was much more negative than we anticipated, with timelier data suggesting that the impact from the latest COVID-19 outbreak had been more modest.” 

“This was not the case though, with services taking a big hit, with increased cases likely driving more caution among consumers,” it said.

The following graphic from Banorte shows the IGAE evolution of the past few years.

“Considering that we penciled in a mild 0.1% m/m expansion, this result implies a notable downward risk to our +0.6% q/q (6.4% y/y) forecast for 3Q21 GDP,” said Banorte. 

The bank added that the 6.4% result in the preliminary third quarter data is still “not entirely out of the realm of possibilities, as pent-up demand may have been released” in September as the wave in cases tied to the Delta variant dissipated rapidly.

“Primary activities show a complete recovery, being 7.35% above their pre-pandemic level,” Banco BASE said regarding the positive aspects of the latest economic data. 

The industrial component for August’s IGAE expanded 0.4%, while construction continued to mark a rebound, increasing 1.9%. Manufacturing showed a 0.2% monthly advance, while mining slipped 0.1%.

LABOR MARKET

The latest jobs data was also released on Monday by Inegi, showing the loss of 544,350 jobs in September.

Banco BASE said the figure indicates a weak labor market recovery since it was the second consecutive month of job losses. 

Due to a drop in the economically active population from around 58.2mn to 57.5mn, the September unemployment rate decreased from 4.33% to 4.18%. 

“The participation rate backtracked again,” Banorte said, adding it was “consistent with the broad deterioration of the labor market." 

“The part-time rate also fell, although it remains relatively high. Outside the labor force, those catalogued as ‘available for work’ increased, which is also a negative development,” said Banorte.