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Is Economic Activity in Mexico Steady despite Trade Fears?

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Mexican economy in 2017

Mexico’s economy (EWW) has been facing uncertainty since the US election, which sent investment and consumer sentiment to record low levels in January 2017. However, in the last few months, the Mexican economy seems to have overcome fears regarding trade restrictions, and many economic fundamentals look stronger. Mexican President Enrique Nieto has also implemented several political and economic reforms to boost foreign and domestic investment in Mexico (UMX). The chart below shows Mexico’s economic growth over the last year.

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GDP growth in 1Q17

The Mexican economy expanded 0.6% in 1Q17 as compared to 0.7% in 4Q16, beating market expectations. The following factors primarily drove economic growth in 1Q17:

  • faster expansion in the services sector, which rose 1% as compared to 0.8% in 4Q16
  • a rebound in the agriculture sector with growth of about 0.7% as compared to -0.3% in the previous quarter
  • industrial output growth of about 0.2% in 1Q17

Uncertainty related to US policy

President Trump’s anti-trade rhetoric seems to have affected investment sentiment in Mexico due to uncertainty surrounding US-Mexico relations. Industrial output also remained subdued in 1Q17. However, recently, Trump’s rhetoric on NAFTA and protectionism has moderated. The Mexican peso (HEWW) also recovered to pre-election levels in April 2017. Exports and private spending have continued to support growth in Mexico in 2017. Service sector growth (IBA) (BSMX) (FNCRY) was a key driver of economic output in 1Q17, whereas mining (MSNFY) remained flat.

Latin American markets have had an impressive year so far, and the market performances of most participants (EWZ) (ARGT) surged in 2017. The iShares Latin America 40 ETF (ILF) is up by about 12% in 2017 as of May 24. The fund has about 27% exposure to the Mexican market. The iShares MSCI Mexico Capped ETF (EWW) has risen about 21% so far in 2017 as of May 24.

We’ll look at business confidence in Mexican markets amid trade fears in our next article.

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