Economics: New China Model’s Mexico Effect

MEXICO - Report 27 Aug 2015 by Mauricio Gonzalez and Ernesto Cervera

To the already extensive list of negative factors of international origin adversely affecting the Mexican economy over the past ten months (plunging prices for oil and other locally produced commodities, uncertainty regarding the timing of the Federal Reserve’s long awaited interest rate liftoff, the weakening of the peso, the announcement of fiscal adjustments, the Greek crisis, etc.), we must now add the Chinese government’s recent devaluation of the yuan as part of Beijing’s decision to turn once again to manufacturing exports as a prime driver of development. Given that China and Mexico compete directly for the US market for manufactured imports, any changes to China’s trade and foreign currency policies have repercussions on Mexico’s exports to its northern neighbor and, hence, on the country’s economic growth.

In this week’s Outlook section, we analyze the ways in which China’s devaluation of the yuan may affect the Mexican economy.

On a related topic, last week the authorities published Mexico’s GDP results for the second quarter of 2015.

In the second quarter of 2015 the Mexican economy grew at a 12-month rate of 2.2%. GEA had projected a result in line with the report (+2.3% e).

The economy’s main growth driver was once again the commercial sector, whose 4.2% expansion of revenues year on year easily surpassed the 1.8% increase recorded for the same quarter a year earlier. The combination of a significant increase in commercial activity in recent months and its increased weight in Mexico’s GDP also made the sector the economy’s top driver of growth between April and June.

The commercial sector accounted between for almost a third of total GDP growth: 0.67 of a percentage point of the 2.2 point expansion reported for GDP overall.

Another segment that delivered a greater contribution to economic growth during the second quarter was that of real estate, rentals of mobile goods and intangibles, whose 3.3% increase between April and June was the most favorable result in 17 quarters.

The transportation segment by no means turned in the strongest expansion, but it accounted for a hefty 12.0% of GDP, making the subsector the third most significant contributor to economic growth in general during the quarter.

Manufacturing and construction, traditionally the two weightiest components of the industrial sector, ranked second and fourth, respectively, in their contribution to GDP growth. Manufacturing added 0.51 of a percentage point to the economy while construction chipped in another 0.21 of a point during the quarter.

It is important to note that construction was the fourth most significant contributor to GDP during the second quarter as opposed to its third place ranking between January and March. That setback came in response both to the loss of momentum in recent months on the part of both the building and specialized works segments. Moreover, infrastructure (civil engineering) activity narrowed on average by 0.3% below levels of a year earlier as opposed to a 1.5% increase during the first quarter of this year. This turn of events casts a pall over the previously bullish 2015 outlook surrounding the construction sector.

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