Itaú BBA - MEXICO – Gross fixed investment accelerated in February

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MEXICO – Gross fixed investment accelerated in February

May 7, 2018

Investment was likely strong in 1Q18

Mexico’s gross fixed investment picked up in the first two months of 2018, in spite of the uncertainties looming in the economy, supported by the rebound of construction (partly reflecting post-earthquakes reconstruction works) and stronger investment in machinery & equipment. The monthly gross fixed investment indicator grew 4.8% year-over-year in February, slightly below our forecast (5%) and median market expectations (5.2%, as per Bloomberg). According to calendar-adjusted data reported by the statistics institute (INEGI), growth was also 4.8% and the three-month moving average growth rate increased to 2.5% year-over-year in February (the highest level in 22 months, from -0.5% in January). Looking at the same metric (calendar-adjusted 3mma), we note that investment in machinery & equipment expanded 3.3% year-over-year (from 0.4% year-over-year in January) while construction investment jumped to 2.2% year-over-year (the first positive print in 20 months, from -1% in January).  

At the margin, momentum has improved substantially. Seasonally-adjusted gross fixed investment grew 0.5% month-over-month in February – on top of 4.3% and 1.1% month-over-month prints in December and January, respectively – which took quarter-over-quarter annualized growth to 16.7% (from 3.2% qoq/saar in January). The firming up of momentum is observed across all components of GFI. Construction investment expanded 15.7% qoq/saar (from 9% in January), with both residential construction (19.2% qoq/saar, 11.1% previously) and non-residential construction (6.7% qoq/saar, 6.1% previously) growing at a more dynamic pace. This suggests that the marginal acceleration of construction investment is not only related to public investment (given reconstruction works and incentives to spend more in the run-up to the July presidential elections). Turning to investment in machinery & equipment (23.1% qoq/saar in February, from -0.3% in January), both the imported component (26.3% qoq/saar, 8% previously) and the national component (8.8% qoq/saar, -12.3% previously) gained momentum.  

Although the recent numbers point to a significant rebound of gross fixed investment in 1Q18, we expect this improvement to be short-lived. Coincident indicators – such as the public sector’s investment in physical capital (18.8 year-over-year in real terms in March and 7.6% in 1Q18, from a 26.3% contraction in 2017) and nominal imports of capital goods (36.1% qoq/saar in 1Q18, from 11% in 4Q17) – indicate that March’s result will also be strong. However, zooming out from the latest data, we still believe that the broader picture is consistent with a weakening of investment. Even though the uncertainty over NAFTA renegotiation has diminished, the uncertainty stemming from the presidential elections will likely be a drag on investment and tight macro policies (both fiscal and monetary) will continue restraining the growth of private and public capital expenditures.

Alexander Müller

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