Many of Mexico’s essential business cycle indicators serve as red flags for a slowing economy. Nevertheless, the country’s prime interest rate of 7.5% does suggest at least some potential expansion via future monetary easing.
As for its bottom-line Gross Domestic Product (GDP) performance on a Purchasing Power Parity (PPP) basis, the United Mexican States showed anemic annual growth of 2.2% at October 2019. Mexico’s GDP increase falls well below the average 4.7% benchmark for all countries over the same period.
Economic downturns historically happen within roughly 8 to 16 months from a peak in a country’s Gross Domestic Product (GDP) performance on a Purchasing Power Parity (PPP) basis.
GDP tracks a long-term growth trend via business cycles of growth or recession that repeat approximately every 5 years or so, albeit that no two business cycles mirror the same duration or size. The United States of America’s National Bureau of Economic Research found that there were 33 business cycles from 1854 to 2009.
The average length of an expansion is 38.7 months compared to 17.5 months during a recession. Historically, the world’s longest economic contraction was the 1929 Great Depression that lasted 43 months. That’s more than double the 18-month duration for the Great Recession which began in 2007 and was caused by the real estate bubble created during the 1991 to 2001 boom states Cameron King in his analysis for Forbes.
Bear in mind that cyclical indicators are erratic and are impacted multiple major and sometimes contradictory forces. Worse, there is no consensus for which indicators universally signal business cycles in all cases.
Nevertheless, The Economist organizes its benchmarks into 3 critical categories: leading indicators that turn in advance of a cycle change; coincident indicators that define when the overall business cycle turns; and lagging indicators that top out following a business cycle.
Mexico’s Leading Business Cycle Indicators
The central banking authority for Mexico eased its prime lending rate thanks to a -0.5% cut from November 2018 to November 2019. While the latest consumer confidence improved, 3 of the other 4 selected leading business cycle indicators deteriorated. Mexican sales of passenger cars and light trucks declined the most, trailed by the psychological consumer confidence indicator then the slowdown in Mexico’s retail sales.
Assuming Mexico’s central bank authority will eventually increase prime borrowing costs, The Economist estimates that an economy hits its highest level about 18 months after interest rates begin to rise compared to 8 to 16 months for waning business and consumer confidence. There are shorter timeframes in advance of an economy’s GDP peak for slowdowns in car sales (6 months), retail sales and building permits (2 to 3 months).
- Interest rates: 7.5% at Nov. 2019 (down -0.5% from one year earlier)
- Business confidence: 98.44075 points at Sep. 2019 (down -2.62% from 101.0894)
- Consumer confidence: 101.7281 at Aug. 2019 (up 0.37% from 101.3528)
- Retail sales: Up 0.62% at Oct. 2019 (down -1.27% from up 1.89%)
- New passenger car and light truck sales: 130,488 vehicles at Dec. 2019 (down -8.3% from 142,284)
Currently, the central bank in Mexico does have some room to cut its prime interest rate in order to stimulate its economy.
Business confidence is an indicator based on opinion surveys revealing how pessimistically or optimistically business managers perceive their companies’ future potential and therefore can anticipate turning points in economic activity. In contrast, consumer confidence measures public opinions on standardized questions about household finances, a country’s economy in general as well as plans for major purchases on durable products lasting over a year or buying a home or an automobile.
Retail sales refers to an aggregate measure of the percentage change in the retail sales index against the same month in the prior year. It measures consumer demand for finished goods and is considered a major macroeconomic indicator of whether an economy is moving towards contraction or expansion. Retail sales focus on volume changes only and exclude price level movements.
The vehicle sales metric specifies the number of new passenger cars and light trucks sold irrespective of price.
Mexico’s Coincident Business Cycle Indicators
Percent changes in Gross Domestic Product (GDP) on a Purchasing Power Parity (PPP) basis are much-scrutinized headline numbers that define whether an economy is contracting or expanding. That’s because year-over-year GDP changes coincide with and thus signal the start of a recession or boom period.
The latest GDP on a PPP basis statistics reveal that Mexico’s economy is still growing although at a very sluggish rate.
- GDP: US$2.628 trillion at Oct. 2019 (up 2.2% from $2.572 trillion)
- GDP per capita: $20,868 at Oct. 2019 (up 1.2% from $20,616)
Please note that Mexico’s share of the world’s overall GDP of $141.860 trillion was 1.9% at October 2019, same as one year earlier.
In addition, the GDP per capita income of $20,868 for the United Mexican States places about 14% above the global average GDP per person of $18,391 as of October 2019.
Mexico’s Lagging Business Cycle Indicators
Two of the 3 lagging business cycle indicators deteriorated over the past 12 months, namely Mexico’s shrinking capital investment and worsening unemployment rate. The drop in inflation did provide some positive news.
Usually capital investment shadows GDP peaks and valleys via a 12-month delay. Both inflation and unemployment accelerate about 6 months after GDP reaches its maximum growth.
- Capital investment to GDP ratio: 21.655% in 2019 (down -1.355% from 23.01%)
- Unemployment rate: 3.448% in 2019 (up 0.12% from 3.328%)
- Inflation rate: 3.767% in 2019 (down -1.13% from 4.898%)
The ratio of capital investment to GDP is a lagging but future planning-oriented indicator that records the value that a country spends on capital development and infrastructure projects divided by its overall GDP output on a PPP basis.
Unemployment rate is a crucial percentage based on a country’s total labor force (not its full population) since it profoundly impacts how many debtors can afford to pay their mortgages and other borrowings.
Inflation rate documents the percentage change in average consumer prices in a country over a one-year period.
Research Reference Materials:
International Monetary Fund, Interest Rates selected indicators, World Economic Outlook Databases (inflation, investment, unemployment). Accessed on January 8, 2020
MarkLines Automotive Industry Portal, Mexico Flash report, sales volume, 2019. Accessed on January 8, 2020
National Bureau of Economic Research, US Business Cycle Expansions and Contractions. Accessed on January 8, 2020
The Economist, Guide to Economic Indicators: Making Sense of Economics (7th Edition). Accessed on January 8, 2020
Wikipedia, Consumer confidence index. Accessed on January 8, 2020