Mexico’s agriculture grows while industry and services lag

Mexico Economic Indicator by Sector 2013-02-21Enlarge GraphThe latest indicator of global economic activity showed a decrease versus the previous month, though agriculture maintained its strength. The IGAE Index is compiled and published monthly by the Mexican Institute of Statistics and Geography (INEGI) and aims to measure the economic activity of the economy. While it does not cover the gross domestic product in its entirety, it serves as an indicator for its trend in the short term. It is divided into the three areas that comprise the economic production of a country: primary sector (i.e. agricultural), secondary sector (i.e. industrial) and tertiary sector (i.e. services).

The graph above shows the overall index and its three components. While the secondary and tertiary sectors showed a monthly decrease of 2.1% and 1.4%, respectively, the primary sector, which includes agricultural products as well as meats, posted an increase of 4.9%. While the change seems large, the agricultural sector is much more volatile than its other two counterparts given its susceptibility to weather conditions and global pricing pressures.

The Mexican economy is largely driven by the industrial sector and therefore the monthly decrease of 2.1% has a much larger impact in the economy, explaining why the overall index dropped by 1%. Additionally, while both the agricultural and services sectors expanded for the year, the industrial sector contracted 2.1%, resulting in an overall yearly increase of only 1.4%.

The sluggish overall growth and the negative growth in the industrial sector are red flags for investors in Mexican ETFs (e.g. EWW, NAFTRAC) or Latin ETFs (e.g. ILF, GML), which are generally concentrated approximately 25% in Mexican companies. It is important, though, to keep in mind that the indicator is lagging and shows the view of the direction of the Mexican economy as of December. Furthermore, the Mexican economy is closely linked to the United States, its main trading partner, therefore a recovery in the American economy will translate into gains in the Mexican economy, and more heavily weighted towards the industrial sector which is the bulk of the Mexican exports.