Itaú BBA - MEXICO – GDP growth weakened in 3Q17, dragged by the earthquakes

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MEXICO – GDP growth weakened in 3Q17, dragged by the earthquakes

October 31, 2017

At the margin, GDP fell 0.2% from the previous quarter, after posting robust sequential expansions

GDP growth weakened in 3Q17, both in year-over-year and sequential terms, dragged by two large earthquakes, which disrupted economic activity in September. The flash estimate of GDP growth came in at 1.6% year-over-year, in line with our forecast and median market expectations (as per Bloomberg). This growth rate implies that the monthly GDP proxy (IGAE) expanded somewhere in between 1.3% and 1.6% in September. According to calendar and seasonally-adjusted data reported by the statistics institute (INEGI), the flash estimate of GDP growth was 1.7% year-over-year and marked a significant slowdown with respect to 2Q17 (3% year-over-year). At the margin, GDP fell 0.2% from the previous quarter, after posting robust sequential expansions 0.6% and 0.7% in 2Q17 and 1Q17. 

The breakdown indicates that service sectors took a significant hit from the earthquakes. The flash readings show that services output recorded its first sequential contraction in almost four years (falling by 0.1% in 3Q17, from a 0.8% expansion in 2Q17). Importantly, a survey published by INEGI estimated that 40% of businesses operating in the affected states (which together account for one third of Mexico’s GDP) closed their doors for at least one day in the aftermath of the earthquakes. Industrial output also performed poorly (contracting 0.5% from the previous quarter, after recording a nil expansion in 2Q17). Average daily oil output fell to an historic low in September (with data available since the early 1980s), as not only earthquakes but also hurricanes disrupted the oil production facilities. However, other industrial sectors, such as manufactu ring, seems to have been less affected (vehicle production, for instance, actually accelerated in September). That being said, we believe the effects of the earthquakes were more detrimental for services output than for industrial output, considering that the latter were already weak (-2.4% qoq/saar in August, as per IGAE’s data). Lastly, the volatile primary sectors (mostly agricult ure) provided some cushion, posting a sequential expansion of 0.5% (after falling by 1.9% in 2Q17).   

Overall, the 3Q17 flash GDP data poses a negative risk to our 2.3% growth forecast for 2017. Nevertheless, GDP will likely rebound in 4Q17 and we see significant buffers for activity in coming quarters. Manufacturing output will likely be boosted by the strength of the U.S. industry, as the U.S. ISM manufacturing index reached 60.8 in September (the highest level in thirteen years). Furthermore, we believe falling inflation coupled with robust employment (growing consistently above 4% year-over-year in the first nine months of 2017) will sustain consumption growth (service sectors were performing strongly until August). On the negative side, the poor performance of oil output and construction activity – reflecting the government’s fiscal consolidation (which has slashed public investment, mainly through PEMEX’s capex) – will likely persist. Also, t he uncertainties associated to NAFTA and the presidential elections pose the risk of a more pronounced deterioration of investment, with negative implications for many sectors of the economy.


Alexander Müller

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