The economy’s better-than-expected performance in H1 was due to resilient household consumption and renewed momentum in the manufacturing sector. However, leading data suggests some of the
tailwinds that boosted growth in H1 faded in Q3. Although August’s trade report and PMI indicators for the July-to-September period still paint a bright picture of the manufacturing sector, data for consumption suggests the long-touted moderation in private spending may have finally arrived.
Retail sales barely expanded for a second consecutive month in July, while auto sales continued to contract through August, reaffirming the narrative that multi-year high inflation is denting households’ real income growth despite a tight labor market and robust remittance inflows. Q3 growth will also reflect the economic impact of the two earthquakes that devastated
Mexico in September, although reconstruction efforts are expected to shore up economic activity in the quarters to come.
The economic outlook remains clouded by uncertainty linked to the renegotiation of NAFTA and the elections scheduled in Mexico for next July. While resilient in H1, GDP growth should moderate in H2 due to the immediate effects of the earthquake on economic activity and slower private consumption growth. Our panel expects growth of 2.2% in 2017.
Next year, the economy is expected to benefit from stronger government consumption ahead of the election and softer inflation. Panelists see GDP growth at 2.3% in 2018, which is up 0.1 percentage points from last month’s forecast.
Inflation eased from a 16-year high of 6.7% in August to 6.3% in September. Banxico kept the policy rate unchanged at 7.00% at its 28 September meeting. FocusEconomics panelists forecast that inflation will end this year at 6.1%, before falling to 3.8% at the end of 2018.
REAL SECTOR | Q2 economic growth showcases resilience in spite of external sector’s subdued performance Expenditure-based data for the second quarter released by Mexico’s national Statistical Institute (INEGI) on 22 September confirmed the economy’s resilient momentum in spite of a negative calendar effect in April related to the timing of the Easter holiday. According to INEGI, GDP rose 1.8% in the second quarter over the same period last year. The report also showed that aggregate supply and demand rose 2.6% year-on-year in Q2 (Q1: +4.0% year-on-year).
The domestic sector continued to send mixed signals in the second quarter. Household spending growth defied expectations of a slowdown in Q2; private consumption grew 3.4%, a better performance than Q1’s 3.0% increase and the best result in four years. Households likely benefited from record-high growth in remittances and a tight labor market, which had a greater impact than multi-year high inflation and rising interest rates. Conversely, persistent
uncertainty regarding the future of NAFTA, upcoming general elections in Mexico in early 2018 and tighter credit conditions continued to stave off fixed investment, which declined 2.3% in Q2 (Q1: -0.1% yoy). Meanwhile, government consumption nearly stagnated in Q2, expanding only 0.1% (Q1:
+1.0% yoy). More discouraging was the external sector’s performance. Despite an upturn
in global trade flows and upbeat dynamics in the U.S. manufacturing sector, export growth decelerated from Q1’s solid 9.1% expansion to a 4.6% increase in Q2. Imports growth also lost some steam (Q2: +5.0% yoy; Q1: +7.6% yoy), but the smaller deceleration meant a larger drag on overall growth. The sector’s net contribution to growth swung from plus 0.6 percentage points in
the first quarter to minus 1.8 percentage points in the second quarter, marking the biggest subtraction to growth since Q3 2008.
The economy’s composition of growth is likely to change in the quarters to come. A contested election cycle next year is likely to keep private investment offshore, while Banxico’s tightened stance and multi-year high inflation are expected to weigh on private consumption in H2 despite strong remittance inflows and a supportive labor market. Conversely, the improvement in global
trade flows is expected to boost demand for manufactured products from Mexico, which in turn should shore up activity in export-oriented services. The Central Bank (Banxico) expects the economy to grow between 2.0% and 2.5% this year. Next year, the Bank sees economic growth at between 2.0% and 3.0%. Our panel expects the economy to grow 2.2% in 2017, which is up
0.1 percentage points from last month’s forecast. Going forward, GDP growth is projected to pick up to 2.3% in 2018, which is up 0.1 percentage points from last month’s estimate.REAL SECTOR | Economic activity takes a hit in July
The monthly proxy GDP (IGAE) produced by the National Statistics Institute (INEGI) expanded 1.0% in annual terms in July. The reading marked a notable deceleration from the 2.4% expansion recorded in the previous month, but came in slightly above expectations of a 0.7% increase.
The weaker print reflected a bleak industrial sector, which contracted 1.6% in annual terms in July (June: -0.3% year-on-year). Although manufacturing output seems to be back on its feet, construction output decreased markedly in the month, likely the result of subdued public spending on infrastructure.
Meanwhile, the services sector expanded at a slower clip in July amid incipient signs that private consumption might be slowing, which weighed on domesticoriented services activity. Growth in the agricultural sector was steady at June’s 2.0%.
On a monthly basis, economic activity eased 0.7% in seasonally-adjusted terms in July, a contrast to June’s 0.6% increase. This leaves activity off to a weak start to the quarter, which is particularly worrying at a time when the recent earthquakes that have devastated the country are likely to have dented economic activity in the last month of Q3.
OUTLOOK | Manufacturing sector activity continues to expand in September
The seasonally-adjusted manufacturing indicator produced by the Mexican Institute of Financial Executives (IMEF) pointed to an expansion in the sector, despite easing from 54.0 in August to 52.9 in September. Data suggests that the earthquakes that devastated the country in early and mid-September did not, however, have immediate effects on the manufacturing sector. The indicator is above the 50-point threshold that separates expansion from contraction in manufacturing conditions in Mexico, where it has been for four consecutive months.
Operating conditions turned less upbeat in September as output and new business growth moderated from the levels seen in August. However, stillstrong expansions in both subcomponents continued to add pressure to manufacturers’ capacity, which prompted firms to intensify their recruitment
activities. Suppliers’ delivery times actually shortened during the month, which was at odds with the reported damage caused by the September earthquakes to the country’s infrastructure.
An alternative indicator that measures the performance of Mexico’s manufacturing sector diverged from this month’s IMEF report as it noted operating conditions in the sector strengthened in September. The manufacturing Purchasing Managers’ Index (PMI) produced by IHS Markit
recorded a back-to-back increase in September, rising to 52.9 from 52.2 in August. Accordingly, the index is now further above the 50-point threshold that separates expansion from contraction in the manufacturing sector.
The Markit report pointed to sustained demand in the manufacturing sector as the driving force behind this month’s increase in the index. New orders growth was the strongest since May 2016, with survey participants stressing robust domestic and overseas demand. In light of strengthening demand,
manufacturers scaled up output for a fifth month running, leading to the strongest increase in over a year. This prompted companies to continue hiring through the month, although employment growth was at its weakest since May. Softer employment growth and stronger demand caused backlogs
of work to mount through September. Regarding prices, input inflation accelerated in September as an unfavorable exchange rate drove the price of some materials higher.
Commenting on the report, Pollyanna De Lima, Principal Economist at IHS Markit, said:
“The latest set of PMI data show that economic conditions in Mexico remained on an upward trajectory, with factory output expanding in tandem with strong inflows of new work. With growth gathering pace in each of the past two months, September rounded off a robust quarter for the sector. This suggests that the manufacturing industry is likely to provide a positive contribution to
Q3 GDP.” According to the FocusEconomics Consensus Forecast panel, Mexican industrial production will increase 0.3% in 2017, which is unchanged from last month’s projection. The panel of analysts surveyed this month by FocusEconomics sees industrial production expanding 1.6% in 2018, which is up 0.1 percentage points from last month’s estimate.
OUTLOOK | Consumer sentiment trends higher in September Sentiment among Mexican consumers continued to increase in September, marking an over one-year high and extending the streak of consecutive monthly improvements in consumer confidence seen since January 2017,
when sentiment fell to a record low following Donald Trump’s inauguration as U.S. President. The seasonally-adjusted index of consumer confidence produced by the Statistical Institute (INEGI) rose to 88.8 in September—the highest reading since June 2016—from 87.9 in August.
The improvement in sentiment was broad-based in September. Consumers’ assessment of the current and future economic situation of Mexico improved this month as a tight labor market and the diminished risk of an adverse renegotiation of NAFTA continued to buttress confidence. Consumers’ views on both their current and future household situations were more upbeat in September, while their propensity to purchase big-ticket items rose in
September from the previous month. This was at odds with multi-year high inflation, but reflects resilient real income growth and a healthy jobs market. The back-to-back increase in sentiment came as a surprise to analysts, who had expected the effects of the two earthquakes that struck the country in early and mid-September to weigh on consumer confidence. However, the survey runs through the first 20 days of the month, which suggests that the full impact of the second and far more damaging earthquake was not accounted for. Natural disasters aside, the gradual but steady improvement in confidence continues to showcase the resilience of the Mexican domestic economy,
which is expected to moderate in H2 but remain supportive of overall growth. Panelists participating in this month’s LatinFocus Consensus Forecast expect private consumption to grow 2.6% in 2017, which is up 0.1 percentage points from last month’s projection. For 2018, the panel sees private consumption expanding 2.5%, which is unchanged from last month.
MONETARY SECTOR | Inflation edges down in September Consumer prices rose 0.31% from the previous month in September, which was below both the 0.49% increase recorded in August and market expectations of a 0.44% rise in September. The surprise largely reflected reductions in public
transport and mobile phone charges as well as lower pass-through effects of the peso, with monthly price increases for non-food merchandise goods losing further steam in September. These improvements were partially offset by robust increases in education prices and energy costs.
Inflation eased from a 16-year high of 6.7% in August to 6.3% in September, the first time inflation softens since last June and the lowest reading in four months. The figure showcased the long-touted effects of a favorable base effect on agricultural products, with inflation for that category rapidly
decelerating in September. The closely-monitored core consumer price index—which excludes volatile categories such as fresh food and energy— rose 0.28% in September from the previous month, which was slightly above the 0.25% increase observed in August. Core inflation softened to 4.8% in
September following August’s 5.0% figure. The stabilization in core prices and a favorable base effect on some non-core products confirms the overarching narrative among our panelists that inflation had already peaked in August. Banxico’s front-loading of interest rate hikes has proven successful in anchoring inflation expectations while the peso, despite being under fire in recent weeks, has firmed up ever since plunging following the election of Donald Trump as U.S. President. Barred a heavy currency sell-off due to an unfavorable outcome of NAFTA talks or political
events ahead of next year’s election, inflation should continue decelerating in the months to come and into 2018. In its August inflation report, the Central Bank stated that inflation will remain
above its 3.0% target this year and should gradually converge to the target towards the end of 2018. Panelists surveyed by FocusEconomics this month expect inflation to end 2017 at 6.1%, which is up 0.2 percentage points from last month’s forecast. For 2018, the panel sees year-end inflation at 3.8%,
which is up 0.1 percentage points from last month’s estimate.
MONETARY SECTOR | Banxico stays put in September, earthquake impact on growth and inflation will be limited The Central Bank of Mexico (Banxico) kept the policy rate unchanged at
7.00% at its 28 September monetary policy meeting, the second consecutive meeting at which it stands pat following a 400-basis-point tightening cycle carried out over the course of last year. The decision, which was unanimous among Board members, reflected a deterioration in the balance of risks for both growth and inflation, warranting the Bank’s current tight stance.
The assessment on growth was conspicuously less upbeat in September as officials noted that economic activity growth in July had been surprisingly soft and concerns around tail risks linked to NAFTA talks persist. In addition, the Board indicated that the impact of the recent earthquakes would be moderate but temporary, with limited implications in longer-term projections. The Board
highlighted that the peso has come under pressure recently, but ruled out the
possibility of the currency weakening on the back of higher U.S. interest rates
before year-end. Banxico suggested that inflation had peaked, citing data for the first half of
September that pointed to easing price pressures. However, officials noted that the overall balance of risks for inflation had deteriorated in recent weeks as knock-on effects following the earthquakes could cause goods shortages and reinvigorate price pressures. The Bank kept unchanged the remaining factors affecting the balance of risks. On the upside, these included potential
second-order effects linked to simultaneous transitory shocks earlier this year and the risk of mounting wage pressures from a tightening labor market. On the downside, a further appreciation in the peso and low energy prices could weigh on inflation moving forward.
The Bank struck a somewhat dovish tone as officials were more cautious regarding inflation. The statement stressed the negative effects of higher rates on economic activity. Officials seemed more focused on acknowledging the risks and potential future shocks on prices and growth rather than establishing a clear path ahead for the Bank’s monetary policy. Our panel sees the Bank
staying put for the remainder of this year before beginning to ease next year. The easing cycle, however, is unlikely to start until the peso stabilizes, inflation begins to fall rapidly and key political risks—including NAFTA talks and general elections next year—fade.
The panel of analysts surveyed by FocusEconomics projects that the overnight interest rate target will end 2017 at 7.03%, which suggests a narrow possibility of yet another interest rate hike. For 2018, analysts expect the interest rate to drop to 6.58% as dwindling inflationary pressures warrant a softer policy stance.
EXTERNAL SECTOR | Remittances remain strong in August Remittances totaled USD 2.5 billion in August, an 8.8% expansion from the same month last year. The result followed a 9.4% year-on-year increase in July. The 12-month trailing sum of remittances reached a total of USD 28.2 in August, the highest reading on record. This represented an 8.8% increase compared to the same period last year, which was slightly above an 8.1% expansion in the 12 months up to July. Remittances benefited in August from a healthy U.S. jobs market and concerns regarding the U.S. trade and migration
policy agenda. Remittance inflows are behind some of the resilience seen in household consumption so far this year, which supported growth throughout H1 despite mounting inflationary pressures and decelerating credit growth. Although fears that President Trump might crack down on immigration in the U.S. have caused some to front-load their remittances, a shift in the drivers of growth—
from growth in the number of transactions to average remitted amount— suggests that, as job creation slows down in the U.S. amid labor shortages, wage compensation is firming up. As such, panelists expect the trend to continue in upcoming months, which bodes well for private consumption in H2.
Notwithstanding the risk of tough measures against Mexican immigrants in the U.S., analysts continue to expect remittances to increase further this year and to reach USD 28.6 billion in 2017. For 2018, the panel sees remittances rising to USD 30.6 billion.
EXTERNAL SECTOR | Manufacturing exports regain some strength in August. The external sector appears to have regained some traction in August. The trade report shows exports expanded 10.3% year-on-year in August, reaching a total of USD 35.8 billion. The figure was above the 8.0% increase recorded in the previous month and reflected stronger overseas sales of Mexican
manufactured products, which account for about 90% of total exports. Manufacturing exports were up 10.7% in annual terms in August, notably above the 7.2% increase recorded in the previous month. The improvement was in line with strong PMIs, manufacturing, employment and automotive
production readings in August. Imports soared 12.2% in August over the previous year, accelerating from a 6.6% year-on-year expansion in July and pushing the value of Mexico’s imports to USD 38.5 billion. The improved performance in imports likely reflected resilient dynamics in the domestic economy. Non-oil durable goods growth decelerated slightly to a still-strong 7.7% increase (July: +7.9% yearon- year), backing up the narrative that private consumption will ease in H2 but
will remain supportive of growth. Capital imports growth also regained all of its strength after nearly stagnating in July, while non-oil intermediate goods also regained some footing in August. The latter points to robust momentum ahead in the manufacturing sector, given intermediate goods’ strong correlation with the manufacturing cycle.
The 12-month trailing trade deficit widened to USD 9.5 billion—above July’s two-year low of a USD 8.7 billion shortfall. Notwithstanding this month’s headline figure, the strong performances of both exports and imports highlight the dynamism of overall trade in Mexico. However, the recovery of the peso and a tight labor market risk are eroding Mexico’s competitiveness, which
could weigh on its external sector. Panelists surveyed for this month’s LatinFocus report expect exports to reach USD 402 billion in 2017, which will represent a 7.4% expansion compared to
the previous year. Meanwhile, imports are expected to grow 6.1% and reach USD 411 billion. For 2018, the panel expects exports to expand 5.1% and imports 5.2%.
ENVIADO DESDE FOCUS ECONOMICS- https://www.focus-economics.com/ Barcelona -España