Mexico’s economy shows mixed signals

Mexico Economic Update

Jesus Cañas and Diego Morales-Burnett

October 25, 2024

Mexico's economy continued growing steadily through August, according to the monthly GDP proxy. However, a weakening labor market and stalled consumption are signs of deceleration going into the fourth quarter. In addition, elevated inflation remains a headwind for the Mexican economy. As a result, the consensus forecast for 2024 GDP growth (fourth quarter/fourth quarter), compiled by Banco de México, declined to 1.3 percent in September (Table 1).

Output steadily increasing

The global economic activity index (IGAE)-the monthly proxy for GDP growth-rose 0.3 percent month over month in August after rising 0.1 percent in July (Chart 1). The goods-producing sector (including manufacturing, construction and utilities) grew 0.3 percent while the service-related activities (including trade and transportation) increased 0.4 percent. The IGAE was up 1.1 percent year over year.

Industrial production flat in August

In August, the three-month moving average of Mexico's industrial production (IP) index, which includes manufacturing, construction, oil and gas extraction, and utilities was flat (Chart 2). However, manufacturing IP grew 0.5 percent, marking the third straight month of growth. North of the border, the three-month moving average of U.S. IP edged down in August and September.

Exports tick down

The three-month moving average of total Mexico exports decreased 0.3 percent in August (Chart 3). The much-larger manufacturing sector increased 0.3 percent, while oil exports declined 11 percent over the same period. Year to date through August, total exports were little changed compared with the same period in 2023, with oil exports down 11.6 percent and manufacturing exports up 0.4 percent.

Retail sales flatten

The three-month moving average of real retail sales was flat in July for a third month in a row (Chart 4). The smoothed retail sales index was down 1.1 percent year over year, indicating weak consumption growth.

Payrolls contract in September

Formal sector employment, meaning jobs with government benefits and pensions, declined an annualized 0.7 percent (-13,000 jobs) in September after also falling the previous month (Chart 5). Total employment, representing 59.1 million workers and including informal sector jobs, however, was up 1.4 percent year over year in the second quarter. The unemployment rate ticked up to 2.8 percent in August.

Peso continues to lose ground against the dollar

The Mexican currency averaged 19.6 pesos per dollar in September, down from August's value of 19.2 pesos per dollar-a depreciation of 2.4 percent (Chart 6). The peso has been trending down since early 2024, likely as a result of domestic political uncertainty and in anticipation of the U.S. presidential election.

Remittances climb in August

The three-month moving average of real remittances to Mexico increased 2.9 percent in August after ticking down 1.4 percent in July (Chart 7). Total remittances through August are up 3.8 percent compared with the same period a year ago. The exchange rate plays a role in the volume of remittances because it determines the cost to the sender and the amount the recipient receives. For example, if the peso depreciates against the dollar, a recipient will receive more pesos for a given number of dollars.

Inflation heads back in right direction

Mexico's consumer price index (CPI) increased 4.6 percent in September over the prior 12 months, lower than the 5.0 percent rise in August (Chart 8). In addition, CPI core inflation, which excludes food and energy, slowed to 3.9 percent. Services inflation remained elevated at 5.1 percent growth. In September, Mexico's central bank lowered its benchmark rate by 25 basis points to 10.5 percent. This is the third rate cut this easing cycle following a 25-basis-point reduction at the bank's August meeting. In its statement, the central bank noted that the global inflation outlook has improved, while the closely watched core inflation rate-considered a reliable indicator for price trends-is expected to keep decreasing.

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