Q1 Results Point To End Of Rebound Bounce

This story was originally published at Plaza de Armas.

Mexico’s official statistics clearing house, INEGI, released first-quarter gross domestic product results last week, and they undermined a prevailing sense of optimism that had led economists and central bankers to ratchet up predictions recently.

Unexpectedly weak Q1 figures showed that the inertia that had initially carried over from the 2010 rebound likely has tapered off; the Bank of Mexico’s most recent survey of private economists showed the consensus 2011 GDP forecast climbing from 4.3 percent in March to 4.4 percent in April.

But the new data suggest a more sluggish year.

GDP expanded a meager 2.1 percent in the January-to-March period on a seasonally adjusted, quarter-to-quarter, annualized rate. That compares with 4.6 percent in Q410, and marks the slowest economic advance in a year.

Even more ominous, the Global Economic Indicator (IGAE), a monthly GDP proxy, actually dropped 3 percent in March. It marked a screeching reversal. Over the previous five months, the IGAE had averaged a vigorous expansion of 5.5 percent.

The government downplayed the lackluster result. “Our prognostic is maintained [at 4.3 percent for full-year 2011],” Finance Minister Ernesto Cordero told a press conference. “We see economic performance this year with optimism.”

The government blamed the farm sector for the bleak result, as northern crops were raked by winter freezes that crippled harvests and obliged the feds to dispatch emergency reseeding funds. Indeed, agricultural GDP, volatile by nature, shriveled 9 percent in the first quarter, seasonally adjusted. This is the “freak weather put the frostbite on our numbers” explanation. Farming and fishing accounts for a slim 4-percent sliver of gross economic output, so even though erratic numbers can sway overall results, they won’t hinder performance over a longer horizon. Message: Don’t worry, growth will return along with new seedlings.

But the horizon still looks cloudy to us. Crop woes aside, the services and industrial sectors both lost steam: ticking up 3.8 percent and 2.6 percent, respectively, versus 4.7 percent and 4.3 percent in Q410.

Overseas, Mexico's external cylinders are sputtering. The Japanese Tohoku quake has disrupted manufacturing supply chains and Asian consumer demand. European nations are trembling under debt defaults and restructuring negotiations. Geopolitical turbulence in the Middle Eastern and North Africa region is weighing on U.S. consumer spending as gasoline prices press higher. In particular, U.S. car sales, the great rebound motor for the Mexican economy in 2010, essentially ground to a halt in recent weeks.

Domestically, internal Mexican growth has been billed as the workhorse poised to pick up demand slack in the face of these external threats. Supporters of this position point to the 9.7-percent and 5.6-percent surges in the retail and financial sectors in the first quarter.

But the resilience of consumer demand in the Mexican economy is actually rather tenuous. For example, one often-overlooked indicator is the recreational and sports services industries, a prime peephole through which to peer into consumer discretionary liquidity. This economic division fell 0.6 percent in the first quarter. Moving into the second quarter, the INEGI April Consumer Confidence Index plunged 2.8 percent in April, stringing together a two-month decline with March and achieving the biggest drop since mid-2009.

As another example, the INEGI Open Unemployment Rate fell from 5.5 percent to 5.2 percent from the last quarter of 2010 to the first quarter of this year, painting a picture of greater hiring by private companies. But that figure only means that more Mexicans actively seeking work were able to find at least one hour of labor (paid or unpaid) in the week prior to the government survey. Drilling deeper into the data, we find the proportion of poor-quality informal employment rose from 27.2 percent to 28.5 percent of the workforce in that time frame.

So GDP forecasts may drift back down in coming months. Then again, even the “optimistic” projection of 4.3 percent by the Finance Ministry is hardly cause to celebrate. Unless Mexico sustains GDP growth rates of 5 percent or more per year, it will remain unable to create enough formal private sector jobs to absorb new workers, improve real wages, raise government services, and generally improve the welfare of the population.

Our bet is that in six months the pundit pack will be looking back at these Q1 data with chagrin. Now that the technical growth rebound from the severe 2007-2009 recession has faded, it looks like the Mexican economy is slipping back into its sub-par 3.0-percent-to-3.5-percent growth band.