Economics: Barely dodging a recession, for now
Last Wednesday’s preliminary report on second quarter GDP defied expectations that the Mexican economy may have embarked on a recession, but only by the barest of margins, as activity gained a single basis point over levels of the previous quarter and only 0.4% compared to a year earlier. But in light of just how weak many other economic indicators behaved in June and July, we can expect considerable debate in the coming months over whether the Mexican economy has, or will soon slip into a technical recession. The service sector remains the main driver of what little growth is being reported, but its mere 0.2% sequential uptick barely sufficed in the face of weak-to-flat results from the agricultural and industrial sectors.
The economic indicators published in recent weeks show that all economic growth drivers are idling or are in retreat, with the exception of non petroleum exports. To that picture, we must add the more pronounced deterioration in general economic expectations.
And consumption, by far the most important component of demand and of the economy’s growth path, is also showing clear signs of weakness, reflecting a deceleration of growth in employment and the wage mass. These developments have contributed to the erosion of all manner of sales, from autos and other durable goods to those at grocery and department stores.
Given the negative tone of such economic data and the extent to which government policy continues to alarm investors and observers in general, we perceive a continuing risk of ratings downgrades or lowered outlooks in the wake of Moody’s decision earlier this year to lower its outlook on a number of A3 financial instruments. That same agency has applauded the solid health of the country’s financial institutions, but Pemex remains the weak flank of public finance and the most likely drag on the debt ratings – and thus the debt servicing and funding costs – of Mexican companies and governments alike. Pemex looms ever larger as a prime source of risk given the extent to which its business plan for the coming years not only disappointed but also confirmed many observers’ worst fears.
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