Economic activity regained its footing in the first quarter following an anemic second half of the year in 2017. An early estimate showed a jump in quarter-on-quarter growth at the outset of the year on broadbased gains across sectors. Separate data suggests that consumption dynamics improved in the quarter, with a fall in the unemployment rate, solid remittance inflows and easing inflationary pressures all pointing to a turnaround in household spending. Although manufacturing output ticked up in March after trailing strong manufacturing-exports data for months, survey data from the manufacturing sector was soft in April. Furthermore, construction activity appears to be getting a boost from pre-election public spending. Meanwhile, a busy political agenda has chilled economic
sentiment; left-wing candidate Andrés Manuel López Obrador has been comfortably leading most polls ahead of the 1 July general elections. His likely victory has spooked the business community and weakened the peso, and it could throw a wrench into the final stages of NAFTA renegotiation talks.
Ebbing inflationary pressures, tighter domestic and U.S. labor markets and firmer credit growth should support household spending this year. Manufacturing exports are expected to benefit from healthy factory output in the U.S., while a successful rewriting of NAFTA would likely boost fixed
investment. FocusEconomics analysts 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 eased for a fourth straight month in April, falling to 4.6% (March: 5.0%). Despite pre-election jitters hitting the peso hard in recent weeks, weaker pass-through pressures are likely to keep Banxico’s tightening cycle on hold in May. FocusEconomics panelists forecast that inflation will
end 2018 at 4.0% and 2019 at 3.6%. REAL SECTOR | Year-on-year GDP growth slows on calendar effect in Q1; quarter-on-quarter data unexpectedly upbeat
Despite seasonal effects obscuring the full picture of the economy, a resilient external sector and stronger consumption dynamics appear to have fueled solid economic growth at the outset of the year. On a non-seasonally-adjusted basis, growth in the first quarter slowed to 1.2% from a year ago, below analysts’ expectations of a 1.6% rise and down from the already-sluggish 1.5% expansion in the fourth quarter of last year. That said, the timing of the Easter holiday this year—in March rather than in April as last year—left fewer working days in the quarter and stunted the unadjusted figures; adjusting for the adverse calendar effect, annual growth in the quarter was robust.
The unadjusted figures showed that softer growth in the first quarter largely reflected slower activity in the services sector and a further contraction in industrial output. Growth in the services sector eased to 2.1% on an annual basis, down from the 2.4% uptick recorded at the end of last year. Despite
services output slowing in the quarter, separate data suggests that exportrelated services were buoyed by strong external demand, while domestic services were likely buttressed by recent gains in household spending. Meanwhile, continued losses in the industrial sector (Q1: -0.8% year-on-year;
previously reported, Q1: -1.1% yoy; Q4 2017: -1.0% yoy) dragged on headline growth for the fourth consecutive quarter, despite an upturn in manufacturing output in the quarter. Although stronger election-year public spending likely boosted construction activity, overall industrial output was almost certainly hampered by continued sluggishness across the mining sub-sectors. On the
other hand, a further surge in primary output sent gains in the agricultural sector climbing in the first quarter (Q1: +5.3% yoy; Q4 2017: +4.2% yoy). Quarter-on-quarter figures paint a more complete picture of the economy, with growth jumping to 1.1% from a quarter earlier—handily beating market
estimates of a 0.7% expansion and a sharp increase from the 0.8% gain in the fourth quarter of last year. On a quarterly basis, all sectors of the economy grew impressively, with gains led by the services sector. Moreover, the industrial sector notched a solid performance following several quarters of sluggishness.
Overall, the economy began the year at a solid pace, and upbeat momentum across sectors at the outset of the year suggests improved full-year growth prospects. That said, several downside risks are weighing on the outlook, including still-high inflation, a weak currency and potential fallout from both the 1 July general elections and the ongoing renegotiation of the North American Free Trade Agreement. 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. Growth is projected to pick up to 2.3% in 2019.
REAL SECTOR | Economic activity growth picks up in February Economic activity data for February suggests that the economy gained traction in Q1 2018, with the monthly proxy for GDP produced by the National Statistics Institute (INEGI) expanding 2.4% on an annual basis in February. The print was an acceleration from January’s 2.1% expansion and marked the fastest rise since August 2017. A pick-up in the headline figure was driven largely by a robust turnaround in the agricultural sector and a solid performance in the services sector. Meanwhile, growth in the industrial sector moderated slightly in February.
The agricultural sector rebounded and grew 8.3% in annual terms in February, contrasting January’s revised 0.8% contraction (previously reported: -0.7% year-on-year). Meanwhile, the services sector grew 2.9% in February, matching January’s print. Healthy growth in services was driven by stronger
activity in wholesale trade, financial services, healthcare and education, and professional services. This was partially offset by moderations in retail trade and transport services activity. Conversely, growth in the industrial sector moderated to 0.6% in February (previously reported: +0.7% yoy) from a revised 0.8% expansion in January (previously reported: +0.9 yoy). February’s easing was the result of a contraction in mining output and softer manufacturing activity versus a year earlier. Month-on-month data confirmed the acceleration in economic growth,
with activity up 0.7% in sequential terms in February, following a monthly contraction in January.
OUTLOOK | Manufacturing activity slows in April on weaker output, new orders Mexico’s manufacturing sector began the second quarter on a soft note, with survey-based data pointing to slower output growth and new orders in April. The seasonally-adjusted manufacturing indicator produced by the Mexican Institute of Financial Executives (IMEF) dipped to a three-month low of 51.7 from a revised 53.7 (previously reported: 54.0) in March. As a result, the index closed in on the 50-point threshold that separates expansion from contraction in the manufacturing sector, above which it has been for nearly a year. On the heels of an apparent upturn in February and March, the IMEF report showed nearly broad-based losses across categories in April. Most notably,
growth in output and new orders both slowed sharply. Manufacturers, in turn, eased up on hiring. On the other hand, both delivery times and inventories climbed in the month, signaling that purchasing activity was likely to have sped up.
In a similar vein, the manufacturing Purchasing Managers’ Index (PMI) produced by IHS Markit showed a slower pace of expansion in manufacturing activity in the month. The index ticked down from March’s 52.4 to 51.6 in April. As a result, the index landed closer to the 50-point threshold that separates expansion from contraction in the manufacturing sector. Growth in output and new orders slowed in April and drove the overall index lower. As a result of still-solid new orders growth in the face of easing output, however, stocks of finished goods declined for the time in a year. As was seen
elsewhere across the economy, inflation of both input and output costs eased in the month; supply chain pressures moderated, moreover. Manufacturers were strongly optimistic about the short term as new export opportunities and equipment upgrades left them brimming with excitement. Buoyant business sentiment, in turn, led to stronger job creation in the month—the only subcomponent
of the index to climb in April. According to the LatinFocus Consensus Forecast panel, industrial production will increase 1.5% in 2018, which is unchanged from last month’s projection.
The panel of analysts surveyed this month by FocusEconomics sees industrial production expanding 1.9% in 2019.
OUTLOOK | Pre-election jitters hold back consumer confidence gains in April Consumer sentiment rose more than expected in April as strengthening economic fundamentals appeared to foster an improved outlook among survey participants. The seasonally-adjusted index of consumer confidence
produced by the Statistical Institute (INEGI) hit a four-month high of 86.5 in April from a revised 84.7 in March (previously reported: 84.5), reversing four months of losses. Despite falling inflation and a tight labor market, the index remained low by historical standards—likely weighed down by recent political uncertainty ahead of the 1 July general elections.
April uptick reflected a broad-based improvement across categories, with assessments of current and future economic conditions posting the strongest gains. Milder gains were recorded in consumers’ assessments of their current and future household economic conditions, in line with easing inflationary pressures and solid remittance inflows in recent months. Views on big-ticket
purchases also ticked up in the month, suggesting real wages have seen some lift as the labor market has tightened.
Despite improvement across most consumer-related fundamentals since the outset of the year, consumer confidence has been a rare holdout in not posting significant gains. Moreover, the eventual turnaround in consumer sentiment appears unlikely until this year’s general elections are settled and
NAFTA talks are successfully wrapped up, which ought to bring about a pickup in household spending and a recovery in business investment. 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 in April Consumer prices fell 0.34% from the previous month in April, contrasting the 0.32% rise recorded in March and marking the biggest monthly drop in nearly two years. The decline was driven by a sharp fall in energy prices resulting from a seasonal decline in regulated electricity prices due to summertime subsidies. Moreover, produce prices fell for another month in April. Partially offsetting these were higher prices for non-food merchandise.
Notably, inflation eased for the fourth consecutive month, coming in at 4.6%—the lowest level in 16 months and below both market expectations and Banxico’s quarterly average inflation forecast of 4.8%. April’s headline reading came in below the 5.0% print recorded in March and was the result
of softer price increases in all categories save for housing and education. Core consumer prices—which excludes volatile categories such as fresh food and energy—rose 0.15% from the prior month, softer than the 0.33% increase recorded in March. Meanwhile, core inflation slowed three-tenths of
a percentage point to 3.7% in April. Given April’s softer-than-expected price pressures and headline inflation undershooting Banxico’s forecast, a rate hike at the 17 May monetary policy meeting now appears more unlikely. That said, the Bank is expected to pay particular attention to the depreciating peso, which could become a major upside risk to inflation in the near term if the currency continues depreciating.
The panel of analysts surveyed by FocusEconomics projects that the overnight interest rate target will end 2018 at 7.40% as dwindling inflationary pressures warrant a softer policy stance. For 2019, analysts expect the interest rate to drop further, to 6.37%.
Banxico expects inflation to moderate gradually throughout the year and end 2018 at 3.8%, before converging to its 3.0% target by the second quarter of next year. Moreover, Banxico expects inflation to end 2019 at 3.2%. Panelists surveyed by FocusEconomics expect inflation to end 2018 at 4.0%, which is down 0.1 percentage points from last month’s forecast. For 2019, the panel
sees year-end inflation at 3.6%. EXTERNAL SECTOR | Remittance inflows ease somewhat in March Remittances totaled USD 2.6 billion in March, a 4.0% increase in year-onyear terms and below the 6.9% rise recorded in February. March’s figure was driven by a solid increase in the number of transfers to Mexico, which slowed somewhat from February’s 6.9% year-on-year expansion—a 13-month high— to 5.3%. Meanwhile, the average remitted amount ticked down from USD 316 a year ago to USD 312.
In line with March’s healthy figure, remittances registered an all-time high of USD 29.2 billion in the 12 months up to March, marginally above the USD 29.1 billion figure recorded in the twelve months up to February. March’s 12-month rolling figure was up 6.3% in year-on-year terms, easing from the
7.3% increase recorded in the 12 months up to February and the softest expansion in four months.
Remittance inflows are expected to continue trending upwards, supported by a very tight labor market in the United States. Although employment growth north of the Mexican border is expected to decelerate amid a nearly depleted pool of available skilled workers—thus weighing on growth in the number of transfers—higher salaries should boost the average remitted amount and
broadly offset softer job growth. 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 30.6 billion.
EXTERNAL SECTOR | Merchandise trade records stronger-thanexpected surplus in March
The merchandise trade surplus widened to USD 1.9 billion in March from USD 1.1 billion in February, underpinned by a pick-up in manufacturing exports and solid global trade dynamics. March’s trade performance surprised market analysts who had penciled in a much weaker USD 326 million surplus. The gains add to a string of data releases that suggest the economy gained
traction in Q1, buttressed by robust growth in the United States and gradually waning domestic headwinds. External demand remained robust in March, with export growth expanding 10.0% in annual terms, easing slightly from the 12.3% increase recorded in February. Exports in March totaled USD 39.7 billion. The healthy print came on the back of a solid performance in auto exports, which eased slightly from February but still grew a robust 16.8% in March amid healthy U.S. production
levels (February: +17.9% year-on-year). Overall, manufacturing exports recorded a 7.5% expansion in March (February: +10.5% yoy). Meanwhile, import growth was weak across the board in March. Non-oil consumer imports—a proxy for domestic private consumption—moderated sizably. Non-oil intermediate imports—which are closely linked with manufacturing activity—eased from double-digit growth. Similarly, capital imports—a proxy for investment—tapered from a 20.1% increase in February to a weaker 3.4% expansion in March. Overall import growth ebbed to 4.5%
annually in March from 11.7% in February, with imports totaling USD 37.7 billion.
The 12-month trailing trade deficit narrowed to USD 9.5 billion in March from USD 11.5 billion in February, below the USD 11.9 billion deficit recorded in March 2017. Panelists surveyed for this month’s LatinFocus report expect merchandise exports to reach USD 436 billion in 2018, which will represent a 6.4% expansion compared to the previous year. Meanwhile, merchandise imports
are expected to grow 6.3% and reach USD 447 billion. For 2019, the panel expects exports and imports to increase by 5.7% and 5.6%, respectively.
Por Focus Economics - https://www.focus-economics.com/ - Desde Barcelona- España
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