The economy expanded a seasonally adjusted 0.7 percent on quarter in the first three months of 2017, following a 0.7 percent growth in the previous period and beating initial estimates of 0.6 percent. The growth was driven by a faster expansion in the services sector (1 percent vs 0.9 percent in Q4); a 0.1 percent rise in industrial production (the same as in the previous period and better than an initial flat reading) and a 1.1 percent increase in agriculture.
Recent trade data showed exports jumped 11.2 percent year-on-year in Q1. Manufacturing exports climbed 9.2 percent and oil exports surged 58.1 percent benefitting mainly by a favorable FX comparison in annual terms and by high double-digit growth in exports to countries other than the US.
Consumer confidence has improved to 84.3 in April 2017, continuing to bounce back from January’s record-low of 69.9 backed by a stronger peso, the increase in the minimum wage in early 2017, and by the fading effects of gasoline price hikes. As such, domestic demand is expected to keep driving the expansion in 2017.
The manufacturing confidence reached a 7-month high of 47.55 in May as manufacturers current assessment on the country's general economic situation and investment improved and the opinion concerning investment remained favorable. Also, Markit Manufacturing PMI has bounced back from a 4-year low reached in December.
On the negative side, despite peso appreciation, inflation is expected to remain above central bank’s upper bound target of 4 percent for most of the year affected by the liberalization of gasoline prices. Elevated inflation rate in connection with Fed’s tightening cycle may force the Bank of Mexico to further raise the borrowing cost. Since December of 2015, the central bank has increased the target for the overnight interbank interest rate on 9 occasions, for a total 375 bps.