Is Mexico Decoupling?

Conventional wisdom holds that Mexico’s economy marches in lockstep with America’s. Mexico sends most of its exports to the US, after all, and Mexico is a middle class nation thanks in large part to the country’s integration into the North American economy.

But on 22 November Mexico reported growth of 4.5 percent over the same period in 2010, well above the 3.9 percent forecasted. Within hours, the Bureau of Economic Analysis announced that the U.S. economy is growing at 2 percent, 0.5 percent lower than previously expected. Alberto Ramos, a senior Latin America economist at Goldman Sachs, expressed mild shock at Mexico’s robust growth in a research note. Regarding the Q3 numbers Nader Nazmi, a Latin America economist at BNP Paribas, acknowledged, “The industrial sector did well as the expected headwinds from the U.S. did not arrive.”

Of course, one quarter’s numbers don’t make for a trend, but this doesn’t appear to be a blip either. Mexico’s industrial output has beat expectations throughout 2011, and unemployment figures have been lower than expected. What gives?

Two trends are at work, both sprouting from the last global financial crisis. First, Mexico has benefitted from the better parts of Washington’s 2008-2009 bailouts. While the banks idled by on taxpayer cash, sacking employees and jacking up fees when they could get away with it, GM and Chrysler used their bailouts to mount an impressive rebound. Detroit has unveiled neat, fuel-efficient rides that have reduced Japan’s share of the US car market. This in turn drove demand at Mexican factories. Fourteen percent of cars sold in the US are now made in Mexico, a record high that attests to Detroit’s re-invention as well as the stable business environment that lures American and German car makers to expand operations in Mexico.

Second, while benefitting from higher demand in certain sectors of the US economy, Mexico has reduced its overall reliance on the United States. Mexico got pummeled from the US recession three years ago because 88 percent of its exports went to the US. Though still high, that figure has dipped below the 80 percent mark for the first time since NAFTA took effect. Seventy-eight percent of Mexican exports are expected to go to the US this year.

Meanwhile, Mexico is expanding its presence in Latin American markets. Exports to Brazil grew 500 percent from 2005-2010; Colombia is another fast growing market for Mexican wares. As more and more Mexican goods head south, the country’s reliance on the north is slowly, but methodically, being reduced.