The economy is gradually regaining traction following an anemic performance in H2 2017. In January, private consumption expanded at a five-month high in annual terms on the back of ebbing inflationary pressures and robust employment growth, while fixed investment rose at its second-highest rate in nearly two years. Likewise, healthy employment growth in February and a marked slowdown in inflation in Q1 should further lift private spending; double-digit capital import growth in the first two months of the year bodes well for capital outlays. A pick-up in investment and another round of successful bidding for multiple oil basins in the Gulf of Mexico are encouraging signs of economic resilience amid a busy political agenda dominated by ongoing NAFTA talks and looming
general elections. Official campaigning began in earnest in early April, with left-of-center nationalist candidate López Obrador leading most polls by a double-digit margin.
Dwindling price pressures, firmer credit growth, tight labor conditions and robust remittances should support household consumption this year. Healthy factory output in the U.S. is also expected to buttress manufacturing exports, while incipient signs of a potentially successful renegotiation of
NAFTA should benefit fixed investment. FocusEconomics panelists expect growth of 2.2% in 2018, which is unchanged from last month’s estimate. For 2019, analysts see growth accelerating slightly to 2.3%.
Inflation decelerated for a third month running, to 5.0% in March from 5.3% in February. The absence of pass-through pressures and a slowdown in core inflation to target levels prompted Banxico to halt its tightening cycle at its 12 April monetary policy meeting, in which it kept the policy rate at
7.50%. FocusEconomics panelists forecast that inflation will end 2018 at
4.1% and 2019 at 3.5%. REAL SECTOR | High inflation dents household spending in Q4, political
noise weighs on investment Expenditure-based GDP data for the fourth quarter confirmed that the
economy’s performance was anemic against a backdrop of subdued real wage growth and political uncertainty stemming from both NAFTA talks and the run up to the July 2018 general election. According to the National Institute of Statistics (INEGI), GDP rose a tepid 1.5% on an annual basis in Q4, a mild deceleration over the 1.6% expansion recorded in Q3 and the weakest print
in four years. Aggregate supply and demand rose 3.0% in annual terms in Q4, a moderate acceleration over the 2.6% increase recorded in the previous quarter. The domestic economy lost some steam in the fourth quarter, with dynamics in both private spending and fixed investment growth deteriorating from the previous quarter amid multiple headwinds. Annual household spending growth eased to 2.5% in Q4 from a 3.2% increase in Q3, the lowest figure since Q2 2015. Private discretionary spending was hampered by peaking inflation and rising borrowing costs, which eroded households’ disposable income despite a tight labor market and healthy remittance inflows. Government consumption contracted yet again in annual terms in Q4, shrinking 0.2% after a 1.1%
decrease in Q3. Meanwhile, fixed investment continued to be a significant drag in Q4, with
business capital outlays contracting substantially amid heightened political noise. Conversely, investment in public works, which had dampened the economy’s performance in recent years amid the government’s fiscal consolidation drive, posted its smallest contraction in a year as public
infrastructure investment unexpectedly expanded for the first time in over four years. Nonetheless, overall fixed investment was still down 2.4% in the fourth quarter, which followed a 0.6% contraction in the third quarter.
After hitting rock bottom in the third quarter, the external sector performed marginally better in the fourth quarter. Export growth swung from an earthquake- and hurricane-induced 0.4% contraction in Q3 to a relatively weak 2.5% expansion in Q4. Although still subdued, overseas shipments benefited
from healthy global trade and robust factory output in the United States, while a weaker peso likely enhanced Mexico’s competitiveness. Imports, however, accelerated in unison, expanding 7.1% in the fourth quarter after a 5.5% increase in the previous quarter. As a result of import growth outpacing that of exports, the external sector subtracted 1.6 percentage points from overall
growth in the fourth quarter, which followed a 2.1 percentage-point deduction in the third quarter.
The economy is expected to regain traction this year as the country clears some of the hurdles impeding stronger growth. These are mainly centered in the political arena, and include general elections on 1 July and ongoing talks to modernize NAFTA. Similarly, household spending should speed up as inflationary pressures moderate and strong job creation persists, which should
trickle down into higher salaries and more available income. Nonetheless, Mexico is far from being out of the woods, and an unfavorable resolution on any of the political fronts currently open could lead to a severe weakening of the Mexican peso and many investment decisions being postponed, which would greatly hurt the country’s economic prospects.
The Banxico expects the economy to grow between 2.0% and 3.0% in 2018 and between 2.2% and 3.2% in 2019. Our panel expects the economy to grow 2.2% in 2018, which is unchanged from last month’s forecast. GDP growth is projected to pick up to 2.3% in 2019.
REAL SECTOR | Economic activity growth regains some momentum in
January Economic activity data for January suggests the economy bottomed out in the last quarter of last year, with a pick-up in economic activity growth pointing to a moderate turnaround in the first leg of 2018. The monthly proxy GDP figure produced by the National Statistics Institute (INEGI) showed a 2.1% expansion in annual terms in January, which was above the 1.1% increase
recorded in December and marked the fastest rise since last August. Stronger growth in the headline figure largely reflected improved dynamics in the secondary and tertiary sectors in January. The industrial sector recorded its first year-on-year expansion in five months in January, rising 0.9% after
a 0.7% contraction in December. January’s expansion was also the highest since last March and reflected improved manufacturing output and higher construction activity, both of which offset another decline in mining and quarrying activities. The decline in the latter, however, was the smallest in over a year. The services sector also performed notably better in January, recording a fivemonth high expansion of 2.9% (December: +1.9% year-on-year). Healthier
activity growth was mostly centered around consumption- and export-related components, with activity in wholesale and retail trade both picking up markedly and growth in transport-related services regaining some traction.
These outweighed decelerations in most other sub-sectors, including financial services and healthcare. On a weaker note, activity in the primary sector recorded a 0.7% contraction in January, contrasting the 2.1% expansion recorded in December.
Month-on-month data paints a bleaker picture of the Mexican economy in the first month, with activity down 0.7% in sequential terms in January. Other high-frequency indicators had already pointed to a potentially weak outturn, including subdued manufacturing exports in January. However, robust factory output in the U.S. should see month-on-month activity rebounding in
February. Similarly, decelerating inflation and a tight labor market is expected to gradually lift activity in consumption-related sectors, which bodes well for overall activity growth.
OUTLOOK | Manufacturing activity strengthens in March The manufacturing sector closed the first quarter on a relatively solid note, with survey-based data pointing to an acceleration in output growth and improved demand levels in March. The seasonally-adjusted manufacturing indicator
produced by the Mexican Institute of Financial Executives (IMEF) rose to a nine-month high of 54.0 in March from the revised 53.1 figure recorded in February (previously reported: 52.6). As a result, the index is further above the 50-point threshold that separates expansion from contraction in the
manufacturing sector, where it has been for 10 consecutive months.In line with other indicators that suggest activity in the manufacturing sector bounced back in February and March following a trough in January, the IMEF report showed a broad-based improvement in operating conditions in the
sector. Manufacturing output rose at the fastest clip in seven months in March on the heels of accelerating new order growth, which hit a near five-year high in the month. Manufacturers continued to increase their staffing levels, with the rate of employment growth broadly unchanged from February’s pace. Amid rising output requirements, firms likely intensified their purchasing activity, with inventories rising at a faster clip in March over the previous month.
In a similar vein, the manufacturing Purchasing Managers’ Index (PMI) produced by IHS Markit showed a faster pace of expansion in manufacturing activity in the month. The index rose from February’s four-month low of 51.6 to 52.4 in March. As a result, the index sits further above the 50-point threshold with inventories rising at a faster clip in March over the previous month.
In a similar vein, the manufacturing Purchasing Managers’ Index (PMI) produced by IHS Markit showed a faster pace of expansion in manufacturing activity in the month. The index rose from February’s four-month low of 51.6 to 52.4 in March. As a result, the index sits further above the 50-point threshold that separates expansion from contraction in the manufacturing sector.
The headline figure reflected faster output growth in March, which resulted from higher new order growth. In particular, new export orders expanded after contracting in February, with survey participants noting successful expansions into new markets and an upturn in international demand as elements buttressing
March’s increase. In a bid to meet higher production requirements, firms hired additional staff members at a faster pace than in February, which allowed manufacturers to work through outstanding work. Some firms, however, stressed that staff hiring was centered around temporary employees. Firms focused on increasing stocks of finished products to meet new orders, while input buying was soft overall amid higher price pressures. On prices, input cost inflation was the fastest in 10 months, with manufacturers signaling higher prices for raw materials and energy amid a weaker peso
and higher oil prices. Firms were for the most part able to pass these costs onto consumers; output inflation was the joint-strongest since mid-2017. Manufacturers’ optimism, however, moderated to a 14-month low on the back of concerns over inflation, financial issues and the upcoming 1 July general election.
According to the LatinFocus Consensus Forecast panel, industrial production will increase 1.5% in 2018, which is up 0.1 percentage points from last month’s projection. The panel of analysts surveyed this month by FocusEconomics sees industrial production expanding 1.9% in 2019.
OUTLOOK | Consumer confidence deteriorates further in March Consumer sentiment continued to trend downwards in March despite the United States’ more conciliatory tone regarding NAFTA, decelerating inflation, a tight labor market and a peso well off its December lows. The seasonallyadjusted index of consumer confidence produced by the Statistical Institute
(INEGI) eased to a one-year low of 84.5 in March from the revised 84.7 figure recorded in February (previously reported: 85.0). March’s decline largely reflected consumers’ more downbeat assessment of both their current and future household economic conditions. Their views on current household conditions hit an over one-year low in March, a puzzling development considering the recent slowdown in inflation, solid remittance inflows and healthy employment conditions. Similarly perplexing was consumers’ appraisal of both current and future general economic conditions,
which improved over February’s reading and thus indicates that electoral uncertainty did not play a big role in March’s subdued print. Notwithstanding March’s decline in confidence, consumer-related
fundamentals have mostly improved since the start of the year, pointing to an eventual turnaround in consumer sentiment. Confidence should also improve as political noise related to the upcoming general election and NAFTA talks dissipates, which ought to reflect in a pick-up in private consumption and a recovery in fixed investment levels. Nonetheless, uncertainty remains high
on the political front, with Donald Trump likely to continue stirring tensions between the U.S. and Mexican administrations. Panelists participating in this month’s LatinFocus Consensus Forecast expect private consumption to grow 2.7% in 2018, which is unchanged from last month’s projection. For 2019, the panel sees private consumption expanding 2.6%.
MONETARY SECTOR | Inflation eases for third consecutive month in March Consumer prices rose 0.32% from the previous month in March, just below the 0.38% increase recorded in February and the third sequential moderationin month-on-month consumer price growth. March’s print representedthe lowest reading in six months. The deceleration stemmed from softer price
increases across most categories, led by a strong slowdown in energy prices, which was in turn led by a sizeable drop in liquified gas prices. Prices for fruits and vegetables experienced a sequential drop in March, but at a slower rate than in February. The decline was partially offset by rising prices for some services, particularly in tourism.
Inflation also eased for the third consecutive month, coming in at 5.0%, the lowest level since February 2017, and undershooting analysts’ expectations of 5.1%. The headline number was also below the 5.3% print recorded in February and was the result of softer price increases in all categories except for housing and other services, with a notable slowdown in food price inflation.
The core consumer price index—which excludes volatile categories such as fresh food and energy—rose 0.33% in March from the previous month, below the 0.49% increase recorded in February. Core inflation slowed three-tenths of a percentage point to 4.0% in March, with lower core goods inflation leading the way yet again amid softer peso-induced pressures. Rapidly declining producer inflation should see core price pressures moderating further in H1. Core services inflation, however, was stickier in March, with prices steady at 3.5% growth.
The stronger-than-expected deceleration in headline inflation prompted Banxico to pause the hiking cycle at its 12 April monetary policy meeting and keep interest rates steady at 7.50%.
The Central Bank expects inflation to moderate gradually throughout this year and end 2018 at 3.8%, then converge to its 3.0% target by the second quarter of 2019. Banxico expects inflation to end 2019 at 3.2%. Panelists surveyed by FocusEconomics expect inflation to end 2018 at 4.1%, which is up 0.1
percentage points from last month’s forecast. For 2019, the panel sees yearend inflation at 3.5%.
MONETARY SECTOR | Banxico pauses hiking cycle in April as inflation decelerates more than projected At its 12 April monetary policy meeting, Banxico’s five-member board unanimously decided to pause the hiking cycle and maintain the policy rate steady at 7.50%, a move widely expected by market analysts. The reasoning behind the Bank’s decision followed lower-than-expected inflation in the first quarter and a steadier peso. Nonetheless, far from suggesting a less
hawkish stance, Banxico emphasized that myriad risks are threatening both the inflation and growth outlooks. It also reiterated its readiness to hike the rate again, if risks to inflation materialize. The communiqué that followed the policy meeting showcased Banxico’s more upbeat assessment of inflation. Officials noted that both headline and core inflation continued to fall through March on account of a tight monetary stance and abating price pressures last year, mainly related to pass-through effects from the weakened peso. In fact, headline inflation averaged 5.3% in
Q1, below the 5.5% expected by Banxico in its last quarterly inflation report. However, and similar to the view expressed in the Bank’s last communication, favorable recent developments on the price front were quickly followed by a succession of risks that authorities argue is keeping the balance of risks for inflation titled to the upside.
Prominent among these were a further depreciation of the peso following an unfavorable result from NAFTA talks or an electoral upset, financial volatility stemming from the general election, and potentially tighter global financing conditions on account of faster-than-expected tightening by the U.S. Federal Reserve. As such, and despite its favorable assessment of current inflation
dynamics, Banxico appears unwilling to let its guard down by signaling a less hawkish stance. On the contrary, the Bank restated its commitment to taking firm and timely monetary policy actions to ensure the anchoring of inflation expectations and the convergence of inflation to the Bank’s 3.0% target, currently expected by H1 2019, which is unchanged from February’s press release.
Another indication that the Bank still has a tight bias in monetary policy was in its assessment of the labor market. Although officials have already noted in previous meetings the lack of slack in the jobs market, it added in this month’s press release a pledge to especially monitor the evolution of labor unit costs. This slightly hawkish amendment to the communiqué suggests that Banxico is
increasingly worried about wage dynamics and their effect on overall inflation, which could lead it to respond with further interest rate hikes.
On the growth front, the Bank sounded cautiously more upbeat than in previous meetings. Officials noted that the economy had continued to grow in the first months of this year, mainly buttressed by growth in services and a modest recovery in industrial activity. It acknowledged a slower pace of growth for household spending, while stressing that investment levels improved somewhat early in the year. That said, the Bank kept the balance of risks to growth skewed to the downside, underpinned by political volatility both domestically and abroad.
All told, while Banxico is unlikely to ease its monetary stance anytime soon, waning inflationary pressures should give officials enough leeway to adopt a wait-and-see approach for the months to come. Although a busy political calendar could trigger some of the aforementioned risks and thus
prompt a further tightening in monetary conditions, a recent string of positive developments on the NAFTA front has increased the chances of a successful renegotiation of the free trade deal. This could see the peso firming up more than currently expected, bringing forward the convergence of inflation with the Bank’s target and thus requiring a more accommodative monetary stance.
The panel of analysts surveyed by FocusEconomics projects that the overnight interest rate target will end 2018 at 7.42% as dwindling inflationary pressures warrant a softer policy stance. For 2019, analysts expect the interest rate to Bank’s target and thus requiring a more accommodative monetary stance.
The panel of analysts surveyed by FocusEconomics projects that the overnight interest rate target will end 2018 at 7.42% as dwindling inflationary pressures warrant a softer policy stance. For 2019, analysts expect the interest rate to drop further, to 6.35%.
EXTERNAL SECTOR | Remittance inflows grow briskly in February Remittances totaled USD 2.2 billion in February, a 6.9% increase in yearon- year terms and below the 7.5% rise recorded in January. The figure was entirely driven by an increase in the number of transfers to Mexico, which
at 6.9% was the strongest year-on-year expansion since January 2017 and nearly double the 3.5% rise recorded in January. Conversely, the average remitted amount was unchanged over a year ago in February, at USD 302. In line with February’s resilient figure, remittances registered an all-time high
figure of USD 29.1 billion in the 12 months up to February, a tad above the USD 28.9 billion figure recorded in the twelve months up to January. February’s 12-month rolling figure was up 7.3% in year-on-year terms, above the 6.6% increase recorded in the 12 months up to January and the fastest expansion in four months. Remittance inflows remain very supportive of growth, with solid employment growth north of the Mexican border buttressing cash transfers home. A very
tight labor market should see growth in the average remitted amount gather speed as a result of higher salaries, which ought to support domestic private spending in the quarters to come.
Analysts expect remittances to increase further this year and to reach USD 29.8 billion in 2018. For 2019, the panel sees remittances at USD 30.7 billion.
EXTERNAL SECTOR | Merchandise trade data remains upbeat in February
On the back of robust factory and auto output in the United States, the merchandise trade balance swung to a USD 1.1 billion surplus in February from the record-high USD 4.4 billion deficit recorded in January. Most components showed strength in February and continue to point to a gradual
economic turnaround early in the year on the back of robust growth in the United States and waning domestic headwinds. Exports rose a healthy 12.3% from the same month of the previous year in
February, coming in only marginally below the 12.5% expansion recorded in the previous month. Exports in February totaled USD 35.2 billion. The solid reading was the result of strong manufacturing exports, with auto exports in particular recording an outstanding 17.9% expansion in the month thanks to strong production levels in the United States (January: +9.0% year-on-year).
That said, overall manufacturing export growth was unchanged at a robust 10.5% in February due to a moderate deceleration in non-auto manufacturing exports. Meanwhile, import growth lost some steam in February, with non-oil consumer imports—a proxy for domestic private consumption—taking a breather.
Other components, however, were quite encouraging. Non-oil intermediate imports—which are closely interlinked with manufacturing activity—recorded a solid 9.1% expansion in February, only somewhat below the 13.0% leap recorded in January. Capital imports, a proxy for investment, recorded an outsized 20.1% increase in February, topping the already upbeat 18.8% rise
recorded in January. Overall import growth moderated to 11.7% in February from 14.1% in January, totaling USD 34.1 billion. The 12-month trailing trade deficit narrowed to USD 11.5 billion in February from USD 11.8 billion in January, below the USD 11.8 billion deficit recorded
in February 2017. Panelists surveyed for this month’s LatinFocus report expect exports to reach
USD 436 billion in 2018, which will represent a 6.4% expansion compared to the previous year. Meanwhile, imports are expected to grow 6.3% and reach USD 447 billion. For 2019, the panel expects exports to increase 5.6% and imports to expand 5.5%
Por Focus Economics - https://www.focus-economics.com/ - Barcelona España
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