Macro Analysis /

Mexico:3Q22 GDP-Dynamism prevails despite a deterioration in external conditions

  • GDP rose 0.9% q/q (4.3% y/y), with upward adjustments in annual figures but lower dynamism in sequential terms

  • Agriculture led at +2.0% q/q, with services high at +1.1%, and industry at +0.6%. The latter two were revised lower

  • We maintain our full-year GDP forecast at 2.7%, expecting a slight decline in activity in 4Q22, mainly in industry

Alejandro Padilla Santana
Alejandro Padilla Santana

Executive Director of Economic Research and Financial Markets Strategy

Francisco Jose Flores Serrano
Juan Carlos Alderete Macal
25 November 2022
Published byBanorte
  • Gross Domestic Product (3Q22 F, nsa): 4.3% y/y; Banorte: 4.1%; consensus: 4.1% (range: 3.8% to 4.2%); preliminary: 4.2% 

  • Gross Domestic Product (3Q22 F, sa): 0.9% q/q (seasonally adjusted figures); Banorte: 0.9%; consensus: 0.9% (range: 0.8% to 1.0%); preliminary: 1.0% 

  • Figures in the annual comparison were high across all three sectors, with services leading (4.5%), followed by primary activities (3.6%), and industry (3.5%). Despite of this, downward revisions centered in agriculture and industry, with services higher 

  • Sequentially, adjustments were mostly to the downside. Industry was cut by 32bps, standing at 0.6% q/q, while services were lower by 12bps to 1.1%. Agriculture was stronger, at 2.0% (+17bps) 

  • September’s GDP-proxy IGAE came in at 0.7% m/m (5.2% y/y), positive considering the 0.4% expansion of the previous month. Dynamism centered on services (1.0% m/m) and primary activities (0.5%), with industry lower (-0.2%) 

  • Today’s result supports our full-year GDP forecast of 2.7%, expecting a slight contraction in 4Q22 considering challenging base effects and heightened risks

GDP in 3Q22 revised to 4.3% y/y. This represents a +4bps adjustment relative to the preliminary figure, better than the 2.4% of the previous quarter (see Chart 1), with a positive base effect. There is not a significant calendar distortion in the period, resulting in a 4.3% y/y expansion using seasonally adjusted figures (Table 1). In the detail and back to original data, we highlight changes in both industry (-33bps) and services (+19bps), standing at 3.5% and 4.5%, respectively (Chart 2). Meanwhile, primary activities came in at 3.6% (-11bps).

Sequential dynamism prevails. GDP grew 0.9% q/q (Chart 3), around 14bps less than what the preliminary print suggested. Despite of the revision, we still believe the result is quite positive, with favorable drivers such as the resumption of social programs payments early in the quarter, a decline in COVID-19 contagions, and the strength in fundamentals (e.g. employment and remittances). In our view, these offset for increased headwinds related to higher inflation and heightened recession risks due to faster monetary tightening. On a positive note, activity surpassed its pre-pandemic level (using 4Q19 as reference) by 0.3%. However, it remains 0.4% lower than its historical high seen in 3Q18 (Chart 5).

By sectors, agriculture maintained a brisk pace at 2.0% (preliminary: 1.8%), in our view benefited by better drought conditions in the northern part of the country, while also taking advantage of more modest fallout from the hurricane and tropical storm season. Industry grew 0.6% (preliminary: 0.9%), as seen in Chart 4. Manufacturing was the main driver at 2.0% –with signs of outperformance in key sectors such as transportation and electronic equipment (using monthly data). On the contrary, both construction (-1.7%) and mining (-1.6%) were lower.

Within the former, weakness centered in edification, albeit with civil engineering losing some steam. Turning to the latter, ‘services related to mining’ fell sharply after a positive performance early in the year –albeit with volatility–, with more stability in remaining sectors. Finally, utilities were stable (0.0%).

Services expanded 1.1% (preliminary: 1.2%), stringing four quarters higher. Inside, 8 of the 15 categories were better. The sector with the largest expansion were corporates (4.3%), other services (4.2%), and wholesales (2.7%). Meanwhile, the most notable falls were at mass media (-4.8%), healthcare  (-1.8%), and support services (-1.7%). We believe it is relevant that categories related to tourism were mixed, with transportation still on the rise (2.3%)  –possibly helped by manufacturing dynamism–, but with lodging (-0.1%) and entertainment (-1.4%) downward. In our view, these two were affected by challenging base effects. Meanwhile, and positive at the margin, retail sales advanced 0.8%. For further details, please refer to Table 4.

The economy kept growing in September. In tandem with the GDP report, the monthly-proxy IGAE for the last month of the quarter was also published, standing at 5.2% y/y, better than our 5.0% and consensus at 4.9%. Seasonally adjusted, activity stood at 5.1%, above the 4.8% flagged in INEGI’s Timely Indicator of Economic Activity. Sequentially, this implies +0.7% m/m, extending the 0.4% from August (with this last figure revised downwards from +1.2%). As already known, industry fell 0.2%, with three out of four sectors lower. Services advanced 1.0%, with 5 of 9 subsectors higher. Increases were centered in wholesales (1.9%), lodging (1.7%), and transportation (1.6%). In contrast, we highlight -1.2% in recreational activities and -1.1% in professional services. Lastly, primary activities were up 0.5%, extending the 4.9% gain of the previous month.

Challenging outlook towards the end of the year, with increased risks for 2023. Despite mixed revisions in today’s figures, the result remained quite positive, supporting our recent upward revision to full-year GDP in 2022 to 2.7%. However, we must note that this forecast implies that activity would fall close to 0.2% q/q in the fourth quarter (see Table 2 and Table 3), impacted by two factors: (1) The accumulated expansion of 3.3% in the first three quarters of the year; and (2) additional challenges for activity stemming from persistent price pressures, additional monetary tightening (driving recession fears), and lingering uncertainty for supply chains, among others.

In this sense, timely data for October is somewhat mixed. The outlook for industry seems more challenging, losing dynamism in September and with figures such as IMEF’s manufacturing PMI and others in the US pointing to a slowdown. In addition, it seems somewhat difficult for mining and construction to gather significant pace considering prevailing conditions, at least for the remainder of the year. Services could hold up better, as suggested by ANTAD sales and with a possible boost from key events in the year such as El Buen Fin and the spillover from the FIFA World Cup. Moreover, high mobility and year-end holidays could also prove a stronger boost than in previous years, at least since the pandemic.

Going into 2023, the outlook seems more dire, with our forecast at 1.0%. Downward revisions to estimates have materialized recently, both by market participants –as seen in the consensus in the latest banking sector survey at 0.9%– as well as from international organisms, with the latest one being OECD (setting it at 1.6%). In this sense, we will be looking into Banxico’s updated estimates next week in its Quarterly Report. In our view, the lack of optimism is driven by the adverse effects from global monetary restriction, looking to drive inflationary pressures down by subduing demand. Other challenges include: (1) Uncertainty about the outcome of the war in Ukraine and its persistent impact on commodities prices and activity in Europe; and (2) China’s deceleration, with COVID-19 still a relevant issue and despite an easing in monetary, financial, and fiscal conditions, among others. As such, our forecast implies sequential declines in GDP through 2Q23 and 3Q23, consistent with said deceleration and at the peak of the effects from policy tightening. Following this, activity could pick up in the last quarter of the year as easing expectations take hold.