Macro Analysis /
Global

Mexico: Ahead of the Curve

  • We expect May’s industrial production to decline marginally at -0.1% m/m (+3.0% y/y)

  • By sectors, we expect both manufacturing (-0.3%) and mining (-0.7%) to fall, but with construction more stable (0.0%)

  • Other indicators to be released include June’s ANTAD sales and the weekly international reserves report

Juan Carlos Alderete Macal
Juan Carlos Alderete Macal

Director of Economic Research

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Francisco Jose Flores Serrano
Francisco Jose Flores Serrano

Senior Economist, Mexico

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Banorte
8 July 2022
Published byBanorte

We expect a modest contraction in May’s industrial production

  • Industrial production (May). We expect IP at 3.0% y/y. The annual figure for this period is skewed upwards due to a difference in working days, with one more relative to 2021. As such, with seasonally adjusted figures we expect a smaller print of 2.8% y/y, which would be below INEGI’s estimate in the Timely Indicator of Economic Activity at 3.3%. More importantly and in sequential terms, we expect -0.1% m/m after expanding 0.6% in the previous month. By sectors, we expect contractions in manufacturing (-0.3%) and mining (-0.7%), partly on more challenging base effects after gains in April, while construction would be more stable (0.0%)

Proceeding in chronological order...

Industry to fall slightly in May, mainly due to a more challenging base. We expect IP at 3.0% y/y. The annual figure for this period is skewed upwards due to a difference in working days, with one more relative to 2021. As such, with seasonally adjusted figures we expect a smaller print of 2.8% y/y, which would be below INEGI’s estimate in the Timely Indicator of Economic Activity at 3.3%. More importantly and in sequential terms, we expect -0.1% m/m after expanding 0.6% in the previous month.

We expect -0.3% m/m in manufacturing (+5.2% y/y), modest considering the previous expansion of 1.2%. Signals so far are mixed, suggesting that dynamism continued despite a difficult backdrop –mainly on external shocks and price pressures–. In general, IMEF’s manufacturing PMI fell to 50.8pts, with three out of five categories lower. The PMI indicator for the US (from S&P Global) moderated to 57.0pts. The latter was corroborated by a mild sequential decline in manufacturing output in said country. However, outbound flows from the trade balance suggested higher production. In particular, manufacturing exports grew 1.4% m/m –with ‘others’ at +2.0%–. Moreover, auto production reached 275.4 thousand units, which translates into a 5.9% m/m expansion. Meanwhile, there are reports of a reduction in refining output across the country’s facilities, which could impact ‘oil- and carbon-related manufacturing’ again. Lastly, employment added a second month higher (using INEGI’s report), with 39.3 thousand new positions. As such, we believe the slowdown will not come on weakness in the sector, but more so from prevailing supply disruptions and a challenging base effect.

Construction would be stable at 0.0% m/m (1.1% y/y), quite positive after a 5.3% accumulated gain in the last two months. In our view, the main drivers would remain tied to government infrastructure projects –with focus turning to the Dos Bocas refinery– and continuing interest in industrial parks. However, housing might remain limited by prices, with PPI for the sector up 16.7% y/y. As such, divergences between business confidence and the aggregate trend indicator remain in place, with the former adding a second month lower while the latter stayed strong. Also consistent with this hypothesis, federal government spending on physical investment was high at 11.6% y/y in real terms.

Mining would fall 0.7% m/m (-1.7% y/y), erasing some of the expansion of the previous month. The sector has been quite volatile though, with ‘related services’ showing notable swings in the last four months and expecting them to backtrack in May. Meanwhile, oil output recovered slightly, climbing to 1,775 kbpd (previous: 1,767 kbdp), although offset by lower gas production. Lastly, on non-oil mining, flows trade balance flows were higher (+10.8%), despite a moderation in prices, suggesting an increase.

If we are correct, signals about a moderation through 2Q22 would gain momentum, especially after a strong start. This is still consistent with our view of a slower, but positive, growth rate in the period, mostly due to a more challenging base effect and external shocks.

Weekly international reserves report. Last week, net international reserves increased by US$262 million, closing at US$198.8 billion. According to Banxico’s report, this was explained by a positive valuation effect in institutional assets. Year-to-date, the central bank’s international reserves have fallen by US$3.6 billion.