Production at Mexican factories fell by more than 1% annually in the second quarter of 2024, a slowdown that the Bank of Mexico (Banxico) said was partly due to weak manufacturing activity in the United States.
In its second-quarter “regional economic” report, Banxico published data showing that manufacturing activity in Mexico’s northern region — home to a large number of maquiladoras, or export-oriented factories — fell 2.6% annually between April and June.
Manufacturing activity also fell in the three other regions monitored by the central bank, but the contraction in the north was the largest.
In Mexico’s north-central region, which includes Mexico’s industrial-focused Bajío region, the year-on-year decline in Q2 was 1.2%, while the country’s central and southern regions recorded annual manufacturing activity contractions of 0.7% and 0.4%, respectively.
Compared with the first quarter of 2024, national manufacturing activity declined 0.2% between April and June, marking the fourth consecutive quarter-on-quarter contraction.
Banxico said the manufacturing sector’s performance in the second quarter remained “weak.”
The slowdown in manufacturing activity comes as Mexico seeks to strengthen the sector by attracting foreign investment amid a nearshoring trend.
While many manufacturing companies have recently announced plans to set up factories here, the majority of foreign direct investment currently comes from companies that already have a presence in Mexico.
Most manufacturing subsectors contracted in Q2
The Bank of Mexico reported that 14 of the 20 manufacturing subsectors recorded a contraction in the second quarter of 2024 compared to the previous three-month period.
Banxico said the decline was the result of “weakness in production destined for both internal and external markets.”
The decline in export output “could be related to the underperformance of the manufacturing sector in the United States” given the “high integration of regional production chains,” the bank said.
Manufacturing output in the United States rose more than 3% annually in the second quarter, but Reuters reported that the sector was “at best ticking over as higher interest rates curb demand for goods and make capital investment difficult.”
The US manufacturing sector fell 1.3% in the first quarter of this year.
Mexico’s strongest sector in Q2 was construction
Banxico noted that Mexico’s economy grew 1.1% annually in the second quarter of this year.
Mexico’s central region, which includes Mexico City, led the way, posting annual economic growth of 1.9%.
The northern region’s economy grew by 1%, while the central-north region recorded growth of 1.2%.
Mexico’s southern region, which includes the country’s poorest states, recorded annual economic growth of just 0.3% between April and June.
The national construction sector grew 7.3% annually in the period, a strong result, but a significant slowdown from the 13.3% annual growth in the first quarter of this year.
Recent private and public construction projects have contributed to the strong growth of the construction sector.
The northern region recorded the largest construction sector growth in the second quarter, at 11.9% year-on-year.
The only other national sector monitored by Banxico that posted annual growth between April and June was tourism, which grew 3.2%, up from 2.7% in the first quarter of this year.
Apart from manufacturing, activity in mining, retail and agriculture all declined in Q2. Annual contractions were recorded in mining by 3.6%, retail by 0.7% and agriculture by 2.7%.
Which regions benefit most from nearshoring?
Banxico’s Monthly Survey of Regional Business Activity, or EMAER, found that 12.9% of Mexican companies with more than 100 employees recorded an increase in production, sales or investment over the past year as a result of the nearshoring, or relocation, trend.
The figure — derived from reported increases in companies’ production, sales or investment between July 2023 and July 2024 — was 3.6 percentage points higher than the previous year.
Banxico found that companies operating in northern Mexico were most likely to benefit from nearshoring.
About one in six companies in the north — 16.9% — reported increased production, sales or investment as a result of nearshoring. That’s a five-point increase in the past year.
The percentage of companies reporting benefits from nearshoring was 13.2% in north-central Mexico, 11.4% in central Mexico, and 7.8% in the south. All of these figures are up from the previous year.
According to the Banxico report, the “perception” of the Mexican business sector is that “the relocation process is underway,” but the general opinion is that the full impact of the nearshoring trend will take time to materialize.
More than 41% of the company representatives surveyed expect the greatest impact of nearshoring to be felt between 2026 and 2030. More than 31% believe the nearshoring trend will have its greatest impact in 2025, while around 4% think Mexico will not reap the full benefits of the phenomenon until after 2030.
Exactly 23% of those surveyed believe that Mexico has passed, or is currently at, its peak nearshoring.
Investment announcements for Mexico exceeded US$100 billion last year, and reached nearly $50 billion in the first seven months of 2024, indicating that Mexico has not yet peaked as a nearshoring destination.
However, there is no guarantee that all of the announced projects will proceed, and there are concerns that new judicial reforms, and other constitutional bills that have yet to be approved, could have a significant negative impact on Mexico’s attractiveness as an investment destination.
JPMorgan Chase CEO Jamie Dimon said last November that Mexico was “probably the number one opportunity” in the world for investors, while in December Thor Equities founder and chairman Joseph Sitt asserted that Mexico had become an “alternative” to China and a “golden” opportunity for investment.
But it remains to be seen whether Mexico will truly seize the nearshoring opportunity during Claudia Sheinbaum’s 2024-30 presidency, or whether factors such as government policies, insecurity, energy and water shortages, and inadequate infrastructure cause the country to fall short of its much-vaunted potential.
Further reading on nearshoring
With a report from El Economista
