Macro Analysis /

Mexico: 1Q22 GDP – We reiterate our 2.1% forecast after an upward revision

  • GDP was revised higher relative to the preliminary print, advancing 1.0% q/q (+1.8% y/y) on better industry and services

  • For March, the GDP proxy IGAE rose 0.3% m/m, with industry resilient, but a marginal downtick in services

  • We reiterate our 2.1% full-year estimate. We recognize higher risks and uncertainty in 2Q22, seeing a deceleration

Alejandro Padilla Santana
Alejandro Padilla Santana

Executive Director of Economic Research and Financial Markets Strategy

Francisco Jose Flores Serrano
Juan Carlos Alderete Macal
25 May 2022
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  • Gross Domestic Product (1Q22 F, nsa): 1.8% y/y; Banorte: 1.7%; consensus: 1.7% (range: 1.5% to 2.0%); preliminary: 1.6% 

  • Gross Domestic Product (1Q22 F, sa): 1.0% q/q; Banorte: 0.9%; consensus: 1.0% (range: 0.8% to 1.4%); preliminary: 0.9% 

  • In the annual comparison, the sectors with the largest increases were services and industry at 0.9% and 3.1%, respectively, both revised higher. Primary activities came in at 1.9% 

  • Sequentially, adjustments were also mostly upwards. Industry was stronger at 8bps at 1.2% q/q, while services were adjusted by +16bps to 1.3%. Primary activities were lower, standing at -2.0% (-19bps) 

  • March’s GDP-proxy IGAE rose 0.3% m/m (+0.4% y/y), rebounding after a modest decline in February. Inside, strength was centered on industry (0.4% m/m), with a more marginal downtick in services  (-0.1%), in part due to a more challenging base effect 

  • Today’s revision supports our 2.1% full-year estimate. However, we recognize that risks through 2Q22 seem to be greater, with additional uncertainty ahead

GDP in 1Q22 is revised up to 1.8% y/y. This represents an +28bps adjustment relative to the preliminary figure, on top of also being better than the 1.1% of the previous quarter (see Chart 1). Despite a relevant calendar effect due to the timing of the Easter holiday which benefited this quarter, the adjustment with sa figures is marginal, staying at 1.8% y/y (Table 1). Back to original data, upward revisions were seen in both industry (+20bps) and services (+31bps), resulting in 3.1% and 0.9%, respectively (Chart 2). On the other hand, agriculture was at 1.9% (+3bps).

Stronger sequential progress. GDP rose 1.0% q/q (Chart 3), about 13bps higher than the preliminary figure. This is positive considering a meaningful slowdown in 2H21, worsening COVID-19 dynamics and difficult weather conditions, among others. In this sense, we believe suggests that the recovery is back on track. As a result, the economy stands 3.0% below its historical high in 3Q18. Using 4Q19 as a pre-pandemic benchmark, output stands 2.1% lower. Considering this, activity is close to the level last seen at the beginning of 2017 (Chart 5).

Industry gained 1.2% q/q (preliminary: 1.1%). Dynamism once again centered in manufacturing, up 1.5%. Based on monthly figures, strength mainly came from non-auto as supply disruptions kept limiting auto production from a substantial acceleration. Overall, this was better than anticipated as the Omicron outbreak was coupled with higher absentee rates, which in turn could have impacted output more. Mining was also positive (2.1%), with very high and unusual volatility in related services, but resilience in oil and non-oil. Construction was somewhat weak at +0.2%, in our view with price pressures taking a toll mostly on ‘edification’, while civil engineering remained propped up by key infrastructure projects.

Services were also better at the margin, climbing 1.3% q/q (preliminary:1.1%), as seen in Chart 4. This was not enough to erase the declines of the previous two quarters. Inside, 11 out of the 15 sectors were higher. Among the outperformers we highlight entertainment (13.0%), lodging (5.9%), and transportation (3.8%). We note that all of them are likely related to less COVID-19 restrictions. Business support services kept falling at -6.5%, accumulating a decline of 72.5% since 2Q21. Remaining sectors lower included retail sales (-1.4%), professional services (-1.3%) and corporates (-0.1%). For further details, please refer to Table 4. Finally, primary activities fell 2.0% q/q (preliminary: -1.9%), impacted by harsh weather conditions early in the year, in turn reflected into additional price pressures within CPI.

The economy remained to the upside in March. In tandem with GDP, the IGAE for the last month of the quarter was released, coming in at 0.4% y/y. This was lower than consensus (0.9%), but in virtually in line to our estimate (0.3%). Seasonally adjusted, activity dipped 0.3% y/y. This was much lower than the +0.5% from INEGI’s Timely Indicator of Economic Activity. Sequentially this implies +0.3% m/m, rebounding after a modest 0.1% decline in February. As already known, industry rose 0.4%. Services stood at -0.1%, with 4 out of the 9 sectors lower. The improvement was concentrated in lodging (2.2%), government services (0.9%) and financial (0.8%). In contrast, we highlight the 3.4% contraction in retail sales, which may be as a warning about the impact of high inflation. Lastly, primary activities accelerated to 4.5%, more than making up for the losses seen in the two previous months despite difficult conditions prevailing.

We maintain our 2022 GDP forecast at 2.1% after today’s report. Given these results, we believe activity remains on track to reach our full-year forecast. Nevertheless, risks abound –especially through 2Q22– as global conditions have deteriorated. As mentioned in previous releases, these include the war in Ukraine, lockdowns in China, increased shipment and delivery times, higher consumer and producer prices, and export bans of some food staples by key producers, among others. To the latter, we must add less accommodative policies globally (both fiscal and monetary) and higher market volatility. This is currently reflected in our quarterly path, seeing a 0.3% q/q expansion in the period (see Table 2 and Table 3). Early data such as INEGI’s Timely Indicator of Economic Activity and the trade balance for April (with our analysis to be published later today) suggest the impact was not as meaningful, albeit likely more evident from May onwards. Currently, the situation in China remains uncertain. There are some signs of recovery in Shanghai –with mobility restrictions eased in the last few weeks– but additional lockdowns may be in store for Beijing as cases are spiking. If the COVID-zero policy remains in place in said country, global supply chains will likely remain at the mercy of the virus.

On local drivers, household income in 1Q22 was boosted by early payments from social programs due to the electoral ban. Hence, a void may be felt through the following months. Some categories in services, such as retail sales and entertainment, might decelerate. On the contrary, stability in virus conditions could help offset some of this, with evidence of an additional return to in-person work and more dynamism in leisure.

For the second half, we expect an upswing in activity. These forecasts rest on three main assumptions: (1) A normalization in Chinese output through 3Q22, in part boosted by monetary and fiscal stimulus in that country; (2) a gradual moderation in price pressures, especially in commodities; and (3) resilient US economic growth, supporting external demand. Nevertheless, monetary tightening should have a more meaningful effect on investment, limiting growth from both local and foreign companies. Given the abovementioned risks, high global uncertainty and less policy support in case of further negative shocks, risks to our forecast seem tilted to the downside. Nevertheless, performance so far is strong enough to remain optimistic about GDP growth this year relative to consensus expectations.