Mexico’s economy grew 1.5% QOQ (19.6% YOY) in Q2, according to preliminary results recently released by the country’s statistical agency (INEGI). These results were slightly better than FrontierView’s Q2 forecasts (1.3% QOQ and 18.1% YOY, respectively). The preliminary data indicates that Mexico’s economic growth was mainly driven by the tertiary sector, which is mainly services, with 2.1% growth QOQ. This was followed by weaker growth in the primary sector (0.6% QOQ, mostly commodities and agricultural production), while the secondary sector (industry and manufacturing) grew by 0.4% QOQ. The service sector greatly benefited from the economic reopening and vaccine rollout, particularly in key retail hubs, such as the state of Mexico and CDMX, after being affected by a spike of COVID cases early in 2021. The fact that services became the main engine of growth in Q2 shows that Mexico’s industrial base has been affected by supply chain disruptions and microchip shortages. The latter has particularly affected Mexico’s key auto industry, which has not been able to fully capitalize on high US auto demand.

Our View

The fact that Mexico’s economy continues to slowly recover is good news for firms; however, the Q2 data also reflects that the country still has a long way to go to reach pre-pandemic levels. For example, comparing Q2 2021 with Q2 2019, the economy grew -2.8%. Moreover, Q2 2021 industrial output is still 4.4% lower than in Q2 2019. Thus, we continue to expect that Mexico’s GDP will rebound in 2021 by 5.7%, albeit it will be a statistical carry-over from the -8.5% in 2020. Also, we continue to believe that all components of GDP will bounce back, although the Mexican economy will not return to its pre-pandemic levels until 2023.

Business Implications​

Firms should make sure to align with their local partners in terms of supply chain, as disruptions across the globe are still expected until H1 2022. Furthermore, firms should focus on making the case for corporate investment in Mexico by explaining that Mexico’s economy fundamentally remains strong and that pockets of opportunities are present, albeit scarce, particularly in industries and segments that are connected to the US business cycle.

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