Mexico’s slowdown in Q4 ’12 is linked to US and may bounce in Q1 2013
The Mexican global economic activity indicator showed decreases across the industrial and services sectors, posing worries for investors. The index is published quarterly more than a month after the end of the period, therefore it serves more as a lagging indicator to confirm trends in the economic growth trends of the country. The indicator is divided into the three core components of gross domestic product: agricultural output, industrial output and services output.
The graph above shows the evolution of the three core sectors over the past 24 months. Mexico had a strong run in 2012, slowed down slightly by the sluggish performance in the agricultural segment, which suffered from weather related conditions and global pricing pressures. By the end of the year the agricultural sector caught up and posted gains of over 10% for the year. The industrial sector had a very strong year mostly on the back of the auto industry recovery in the U.S.; Mexico is a large supplier of industrial equipment and components for American companies and a large part of its exports are dominated by this sector. The services sector was relatively flat throughout the year, affected by urban unemployment in the 5.5%-6.0% range, which is relatively high for Mexico.
The slowdown observed in the last quarter of 2012 is worrisome, though given the large correlation and dependence of the Mexican economy on the American economy, it is likely that the decline was driven by fiscal cliff concerns in the U.S. Many businesses in the industrial sector slowed down production due to the demand uncertainty for 2013 given the economic and political concerns at the time. It is possible, and very likely, that the Mexican economy will recover strongly once the American economy picks up speed in Q1 2012, as it has thus far.
Investors in Mexican ETFs such as EWW or the locally traded NAFTRAC should watch other near term macroeconomic indicators closely to gauge the direction of the Mexican economy. Other Latam ETFs, such as ILF and GML, may benefit if Mexico picks up speed given their 25% exposure to Mexican equities plus the dependence of other Latin American economies in other large recovering economies aside from the U.S., such as China and Brazil.
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