Macro Watch: Mexico industry, CentAm outlook

Mexican industry rebounds

Mexican statistics agency Inegi reported industrial production in January expanded 0.6% month-on-month in seasonally adjusted terms. However, the indicator contracted 1.1% in the annual comparison following sustained contraction in 4Q18.

The monthly increase is the first after three months of consecutive declines, tied to continued contraction of oil production in Mexico.

January's result notably featured positive monthly increases (in adjusted terms) for all four tracked aggregates of industrial production (mining, electricity, gas and water, construction and manufacturing).

"The reading of the IP data is positive, however, we foresee the productive weakness of the sector in the coming months," wrote Citibanamex in a note. The bank added that oil production would continue to decline, while car production, which was a major boost in January, contracted again in February

"On the demand side, consumption indicators point to a lower strength, while on the investment side, [spending] coming from the public sector could continue to support construction," added Citibanamex.

"Even if industrial production is flat between January and March, today's data mean that the drag on GDP from industry in Q4 - worth around 0.3 percentage points - will disappear," wrote Latin America economist Edward Glossop of Capital Economics in a note. "That will support GDP growth. January's data also support our view that industry is likely to hold up relatively well in the near term. That said, Mexican industry is likely to succumb to the downturn in US growth later this year."

IDB sees growth, challenges in CADR

A new report from the Inter-American Development Bank (IDB) suggests that while growth for Central America and the Dominican Republic (CADR) looks to once again surpass 4% in 2019, the subregion faces "significant challenges that arise through the financial channel... not limited simply to fiscal issues."

The IDB report cited IMF projection of 4.2% growth in 2019 "as the effects of events in 2018 dissipate, and in line with growth in the United States," following slower growth in 2017 and 2018, estimated at 3.8% and 3.9%, respectively.

Specifically, reported the IDB, the external challenges facing the CADR include a drop in the international prices of the region's main export products, such as sugar and coffee, as well as the beginning of a cycle of interest rate hikes in the US and a decline in corporate revenues there, as the boom from the 2017 corporate tax reform there fades.

"Uncertainty also persists around a potential adjustment to trade policy to rebalance trade, which could be a drag on the global economy," said the entity. "Domestically, countries have less fiscal space, while some also face difficult climate and socio-political conditions."

The entity also pointed out that growth in the CADR would continue to vary considerably country by country as each addresses specific challenges.

For example, the IDB pointed to the socio-political crisis in Nicaragua, which is estimated to have caused a 4% decline in GDP last year. Whereas one of the region's strongest economies, Panama, also faced its own challenges last year, seeing an estimated GDP growth of 4.6% that was nevertheless limited by weak performance in the construction sector in early 2018.

The IDB pointed out, however, that on the whole the CADR is poised to confront key common challenges, "We trust that the region will improve its resilience to these challenges by consolidating its economic fundamentals, continuing to push for regional integration, and strengthening its institutions. All of this will contribute to making the region more attractive and competitive."