Home Business-newBusiness Is Mexico headed for recession? Yes, one forecaster predicts

Is Mexico headed for recession? Yes, one forecaster predicts

by Yucatan Times
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The Financial Times reports that an economic forecasting agency claims Mexico is about to plunge into recession for the first time since 2009.

The dire prediction runs counter to the prevailing market view. Although Mexican economic growth is slowing, most still expect to see expansion of at least 2 per cent this year.

A panel of 22 banks and other organisations polled in April by data analysts Consensus Economics found a median gross domestic product growth forecast of 2.4 per cent for 2016, with the lowest estimate 1.8 per cent.

In March the Bank of Mexico cut its growth forecast amid a “complex” economic outlook, but it still foresaw growth of between 2 and 3 per cent this year while the IMF also pencilled in 2.4 per cent growth in its April global economic outlook.

The forecast of recession comes from World Economics, which produces a family of sales managers’ indices or SMIs, based on replies from a panel of salespeople across the services and manufacturing sectors, which it claims is the most forward-looking data series available.

Although these SMIs are little known, World Economics’ parent company is Information Sciences, which developed the widely followed purchasing managers’ indices or PMIs, now owned by Markit.

The headline SMI reading for Mexico came in at just 47.3 in May and has been below 50 — the cut-off between an increase or decrease in activity — since February, as the first chart shows. All five sub-components — confidence, market growth, sales, prices and staffing — have also slumped below 50.

Mexico. Headline sales managers index

Ed Jones, chief executive of World Economics, said, as a result, that “recession looms”.

“Certainly we see Mexico going that way. In the last three to four months there has been negative sales growth. We equate sales to the level of output,” said Mr Jones, whose US SMI measure has been a reasonable predictor of US GDP growth.

“We are probably a good two to three months ahead of where the official data would be. For the next month or two [the Mexican SMI] is likely to stay in negative territory, so the recession [defined as two straight quarters of negative growth] is coming.”

Mr Jones expects Mexico to have to revise down its first-quarter growth figure of 0.8 per cent, a view shared by others.

Edward Glossop, emerging market economist at Capital Economics, “fully expects” a downward revision, particularly given data last week showing industrial production fell 2 per cent year-on-year in March, far worse than expected, alongside souring consumer confidence and a slide in president Enrique Peña Nieto’s approval rating.

Nevertheless, Mr Glossop predicts a recession “is some way off”. He forecasts that year-on-year growth will be revised down to 2.3 per cent for the first quarter (from 2.7 per cent), before edging higher as the year progresses, “which is by no means a disaster when you look around the region”, given that Latin America as a whole is tipped to endure its second straight year of recession this year.

“Though [Mexico] is growing at a very sluggish pace, it’s by no means at risk of recession in our view,” Mr Glossop says. “Retail sales are still growing at a very strong pace. We see that continuing for the next few months as inflation remains low and interest rates are accommodative.”

Carlos Capistran, Mexico economist at Bank of America Merrill Lynch, foresees a “mild deceleration” this year, with growth dipping to 2.25 per cent, rather than a recession.

“The services sector, which is the largest sector of the economy, is growing above 3 per cent. We expect [this] to moderate but it will remain close to 3 per cent.

Latam. Headline sales managers index

“This should be enough to help the economy to avoid a recession despite weak industrial production and a retrenching by the government,” says Mr Capistran, who says the peso “has been acting as a buffer, depreciating to help net exports and with a very low pass through to inflation, which is helping the services sector”.

Gustavo Rangel, chief economist, Latam at ING Financial Markets, also believes it is “highly unlikely that Mexico will experience recession”.

Mr Rangel concedes “that headwinds have increased”, with pressures mounting on government finances, the oil industry and manufacturing exports, but argues that “domestic demand remains resilient, anchored by credit growth, low inflation, rising remittances (in peso terms) and a steady drop in the unemployment rate.”

With service sector growth “helping offset a slump in industrial sector,” Mr Rangel says that “even though the balance of risks is skewed towards a slowdown, we don’t think there are convincing elements to suggest we are heading to a recession”.

Across Latin America as a whole, World Economics saw the recession deepening in May, with the headline SMI reading falling to 45.2, its fourth straight decline since hitting 49.8 in January and the 13th successive sub-50 monthly reading, as the second chart shows.

By Steve Johnson for The Financial Times

Source: ft.com

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1 comment

Peter Hobday May 19, 2016 - 8:45 pm

I was a sales manager. And I always predicted low results. That way my directors were pleased I beat forecasts. You have to compare forecasts with actual results.


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