Itaú BBA - MEXICO – Domestic demand accelerated significantly in 1Q18

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MEXICO – Domestic demand accelerated significantly in 1Q18

June 20, 2018

Consumption and investment strengthened

The demand-side breakdown of GDP shows that the robust growth observed in 1Q18 was driven by stronger consumption and investment (both private and public). Aggregate supply (that is, GDP plus imports of goods & services) grew 2.4% year-over-year in 1Q18, in line with median market expectations (as per Bloomberg) and slightly below our forecast (2.5%). According to calendar-adjusted data reported by the statistics institute (INEGI), which nets out the effects of the Easter holidays, aggregate supply accelerated to 3.8% year-over-year in 1Q18 (from 3% in 4Q17). Notably, looking at the same metrics (calendar-adjusted data), the demand breakdown of GDP reveals that the growth of domestic demand was 3.5% year-over-year (from 1.2% in 4Q17) the highest print in two years. Private consumption and private investment recovered meaningfully in 1Q18, growing at 3.6% year-over-year (from 2.5%) and 3% year-over-year (from -2.3%) respectively. On the government’s side, both consumption (1.5% year-over-year, from -0.2%) and investment (9.5% year-over-year, from -2.9%) picked up, temporary pausing the fiscal consolidation efforts. Inventory accumulation added 0.2pp to GDP growth, while net exports of goods and services subtracted 1.8pp as imports (7.8% year-over-year in 1Q18, from 7.3% in 4Q17) expanded at a faster pace than exports (2.4% year-over-year, unchanged from the previous quarter).   

At the margin, domestic demand gained significant momentum (although this is somewhat influenced by temporary reconstruction works). The seasonally-adjusted quarter-over-quarter annualized growth rate of domestic demand shot up to 7.9% in 1Q18 (from 1.4% qoq/saar in 4Q17) the highest print in more than eight years. Private sector demand led the sequential acceleration, with private consumption and private investment expanding 6.2% qoq/saar (from 1.4%) and 12.7% qoq/saar (from -1.8%) respectively. Nevertheless, the momentum of government consumption (4.3% qoq/saar, from 2.8%) and government investment (19.7% qoq/saar, from 14.4%) also strengthened significantly. Given stronger domestic demand, imports also accelerated (13.1% qoq/saar, from 11.8%) while exports lost some steam (10.6% qoq/saar, from 17.5%) although their sequential growth remains strong.

We expect GDP growth to accelerate to 2.3% in 2018 (from 2% in 2017). Although the strong sequential growth observed in 1Q18 is likely temporary (linked to reconstruction efforts following the natural hazards that hit Mexico in the second half of 2017), it implies a big carry over effect for the rest of the year. As of now, the tailwinds boosting the economy seem to be more than offsetting the headwinds. The tailwinds are: the robust labor market and much lower inflation (which supports real wages, and likely explains the pick of consumption); the acceleration of the U.S. economy, which boosts Mexican manufacturing exports; and smaller budget cuts (relative to 2017) implying a smaller fiscal drag. On the headwinds side, there are uncertainties (mainly associated to NAFTA and elections) affecting business and household confidence and tight macro policies (both monetary and fiscal).

Alexander Müller

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