Mexico surprises with above-forecast growth on export surge

Mexico’s economy grew the most in a year during the first quarter, surprising most economists, as robust remittances stoked domestic consumption and exports surged to meet strong US demand.

Gross domestic product expanded 1.1% in the first quarter from the previous three months, compared with the 0.8% median estimate of analysts surveyed by Bloomberg, according to preliminary data released by Mexico’s national statistics institute on Friday. From the same period a year ago, the economy grew 3.9%, also up from the economists’ 3.3% forecast.

“This is a solid report, showing a resilient economy on the back of supportive remittances, rising exports, and improving labor conditions,” said Andres Abadia, chief Latin America economist at Pantheon Macroeconomics. “We expect economic activity to be more resilient than in previous cycles.”

The economy’s accelerating growth gives some pause to economists who’ve predicted that the country is headed for a contraction later in the year, due to the expected downturn in the US, Mexico’s biggest trading partner. Part of the surprise is the boost from the domestic market, which has contributed especially to the revival of the services sector after it plunged earlier during the pandemic.

The Mexican peso erased earlier losses and strengthened as much as 0.3% after the first quarter release.

US Slows

Mexico’s growth contrasts with the situation in the US, which earlier this week said its gross domestic product rose at a 1.1% annualized rate in the first three months of the year, slowing more than expected. Brazil, Latin America’s largest economy, was also surprised on Friday with faster-than-expected growth during February. 

Goldman Sachs Group Inc. raised Mexico’s forecast for this year’s GDP growth to 2.1% from 1.8% after the preliminary data, according to a note by its chief Latin America economist Alberto Ramos.

“There’s strength in the labor market, with the rise in minimum wages, that permeates other salaries in terms of an ability to negotiate,” said Montserrat Aldave, an economist at Casa de Bolsa Finamex. “There could be a certain resilience even if the United States falls into a recession, because of this strong internal demand.”

The agriculture sector grew 2.4% in the first quarter from the year prior, while manufacturing grew 2.7% and the services sector 4.4%. The economy has now posted six straight quarters of growth, the longest run under President Andres Manuel Lopez Obrador, underscoring its resilience and the sustained demand for goods produced in Mexico’s manufacturing centers.

And in a promising development heading forward, monetary policy may be near an inflection point after almost two years of tightening. Banco de Mexico’s Governor Victoria Rodriguez said on April 25 that the central bank will discuss halting its record hiking cycle of interest rate hikes in the next board meeting in May.

The board members of Banxico, as the central bank is known, voted unanimously to raise borrowing costs by a quarter of a percentage point in the last meeting, pushing the key rate to a record 11.25%. The bank has acted in recent months far more aggressively than other inflation-targeting banks across Latin America.

Economists in the Citibanamex survey of economists published last week marked up their forecast for 2023 gross domestic product growth to 1.6%, up from 1.4% in the previous survey from early April and 1% in early February. That is in line with the estimate given by the central bank in March. Both the government’s fiscal austerity and the bank’s tightening cycle have placed restrictions on economic growth, according to analysts.

Nevertheless, manufacturing companies have been moving especially to states in northern Mexico as part of a global relocation process known as nearshoring. The record $53.6 billion in exports in March, which led to an unexpected trade surplus, was a sign that the country continued to see demand for its goods in the US.

Mexico has turned into a gleaming point of investment for everyone from electric vehicle makers to a slew of companies looking to relocate manufacturing from countries farther from US consumers. The rush for industrial space has analysts predicting it will transform Mexico’s commercial future if the country plays its cards right.

“Nearshoring is already helping the Mexican economy to keep the growth momentum achieved last year,” said Gabriel Casillas, chief Latin America economist at Barclays Plc. “This is supporting a more dynamic environment in construction -in which commercial bank credit is actually increasing at rates above 100% year-over-year in nominal terms-, as well as in services related to the planning, design, and development.”