Itaú BBA - MEXICO – GDP growth accelerated at the margin in 4Q17, recovering from natural hazards

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MEXICO – GDP growth accelerated at the margin in 4Q17, recovering from natural hazards

February 23, 2018

We foresee a slight acceleration in 2018

Mexico’s GDP growth slowed down in 2017 – in the midst of an uncertainty context (with NAFTA renegotiation and the forthcoming presidential elections standing out as key risks), plunging oil output, and the doubling of inflation (which ate through real wages) – but recovered momentum in 4Q17 (after suffering the effects of natural hazards in 3Q17). The monthly GDP proxy (IGAE) grew 1.1% year-over-year in December, with growth for 4Q17 posting 1.5% (below our forecast of 1.8%, which matched Bloomberg’s median market expectations and the flash estimate published by INEGI last month). According to calendar-adjusted data reported by the Statistics institute (INEGI), the IGAE expanded 2% year-over-year in December and also 1.5% year-over-year in 4Q17 (from 1.6% in 3Q17). Looking at the full-year figures, we note that in 2017 GDP growth slowed down to 2% (from 2.9% in 2016) with slower expansions across all the main sectors: services (3%, from 3.9%), with retail sales weakening substantially; industries (-0.6%, from 0.4%), with manufacturing outperforming mining and construction; and the small and volatile primary sectors (3.3%, from 3.8%), which basically represent agriculture.   

At the margin, GDP growth rebounded significantly (led by the service sectors). In December, the seasonally-adjusted monthly GDP proxy gained 0.7% from the previous month and quarter-over-quarter annualized growth jumped to 3.2% (from -0.7% qoq/saar in 3Q17). Importantly, as observed in the chart below, this rebound is not only about the normalization of oil output (which bore the brunt of the hurricanes and earthquakes in 3Q17) but also visible in GDP growth excluding mining and the volatile primary sectors (3.4% qoq/saar in 4Q17, from 0.1% in 3Q17). Granted, services sectors – particularly retail – also took a hit from the natural hazards.

We expect GDP growth of 2.1% in 2018, slightly above that recorded in the previous year. The factors playing against economic growth in the short-term are tight macro policies (fiscal and monetary) and the uncertainties associated to NAFTA and elections (which put investment decisions on hold). On the positive side, we note that the fiscal drag will be smaller in 2018 relative to 2017. Moreover, a dynamic U.S. industry, coupled with a competitive real exchange rate, will likely sustain Mexico’s manufacturing exports. Finally, lower inflation and a robust labor market (supported by stronger US activity which is highly correlated to the Mexican business cycle) will stimulate consumption in 2018.


Alexander Müller

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