Banorte says Q1 data give reason for Mexico optimism amid global economic gloom

The latest economic indicators in Mexico have some economists upbeat on first quarter GDP growth despite factors such as record inflation, fresh disruptions to global supply chains from COVID-19 in China, and the war in Ukraine.

“Growth appears to have accelerated compared to the last quarter of 2021,” Ramsé Gutiérrez, vice president and portfolio manager at Franklin Templeton in Mexico, told BNamericas, even with central banks racing to hike rates and rising uncertainty over the Russia-Ukraine war.

On Tuesday, statistics agency INEGI updated and released its GDP growth proxy indicators for February and March, respectively, with the economic activity indicator (IGAE) being revised to 0.22% growth in February on a monthly basis and 2.8% year-on-year.

Meanwhile, INEGI's leading economic activity indicator (IOAE) for March suggested IGAE will reach 0.83% month-on-month, which would be the fourth month of consecutive growth.

Alejandro Cervantes Llamas, head of economic regional analysis at local financial services player Grupo Financiero Banorte, told BNamericas the proxy data suggests, “the growth of the Mexican economy for the first quarter of this year is going to be close to 1.7, 1.8% annually with seasonally updated figures.”

This is “consistent with our growth forecast of 2.1% for the economic activity of Mexico for all of 2022,” he added. It would be the strongest quarterly growth since 4Q20’s 3.7% surge in the rebound from the pandemic lows.

INEGI is set to report its preliminary estimate for 1Q22 GDP growth on April 29.

Cervantes’ outlook is more optimistic than most, with the IMF lowering its forecast to 2% from 2.8% on Tuesday in its latest World Economic Outlook update.

Likewise, the April 5 Citibanamex survey of 34 banks produced a median estimate of a 1.9% expansion for this year, down from 2% in the previous biweekly survey.

And Gabriela Siller, head of economic analysis at local lender Banco BASE, told BNamericas their 2022 growth range estimate of between 1.5% and 2% shows that the Mexican economy continues to recover “but has not yet reached pre-pandemic levels.” She added they expect 1Q22 growth to come in at 1.4%.

REASONS TO BE BULLISH

“Even though there have been a lot of private sector economists that have revised their forecasts downward, the economic situation in Mexico really doesn’t look that bad,” Cervantes said.

While inflation has had some impact on household consumption, wage growth for formal sector workers “has been greater than inflation in every state of the country," he said.

“Formal job creation has been strong,” said Cervantes. “Consumption, despite this inflationary spike, continues to be strong enough to support our forecast.”

He added that external demand for products manufactured in Mexico continues to hold strong despite uncertainty surrounding the war in Ukraine.

Global monetary policy tightening does stand to eventually hamper growth, including in Mexico, said Cervantes.

Estimates for the Mexican year-end reference rate, which currently stands at 6.5%, are hovering between 8% and 9%, with worst case scenarios putting it at 10% in December.

However, he said, “We’re confident that the economic impact of restrictive monetary policy will have a bigger impact on 2023 than in 2022,” due to the lag between the higher benchmark rate and the time it takes for banks to begin raising rates for their customers. 

Cervantes added they are sticking to this year’s 2.1% forecast even with these downside risks coming into play.

AN ADVANTAGE

Mexico has reason to believe its economy has an advantage in the current global context, according to some experts.

The country’s proximity to and trade with the US and Canada should make it the obvious choice to supplant problematic supply chains with China, according to Alejandro M. Hernández Bringas, president of Mexican finance executives association IMEF.

Speaking at a press conference Tuesday, Hernández said the geographical factor stands to be a growth driver for the Mexican economy.

“Mexico could be the supplier that jumps in to replace these Chinese products and, in this way, get some traction on growth,” he said.