Itaú BBA - MEXICO – Gross fixed investment and private consumption gained traction in 1Q18

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MEXICO – Gross fixed investment and private consumption gained traction in 1Q18

June 6, 2018

Investment accelerates in spite of uncertainties, and consumption is supported by real wage bill

Mexico’s gross fixed investment picked up in 1Q18, in spite of NAFTA and elections uncertainties, supported by significantly stronger investment in machinery & equipment and the rebound of construction. The monthly gross fixed investment indicator fell 4.1% year-over-year in March – below our forecast (-3%) and median market expectations (-2.6%, as per Bloomberg) – dragged by a negative calendar effect (i.e.: less business days because of the Easter holidays). In fact, according to calendar-adjusted data reported by the statistics institute (INEGI), growth was quite higher in March (2.1% year-over-year) which implied an expansion of 3.1% year-over-year in 1Q18 (from a 2.3% fall in 4Q17). Looking at the same metric (calendar-adjusted data), we note that investment in machinery & equipment jumped 7.1% year-over-year in 1Q18 (from -1.7% year-over-year in 4Q17) while construction investment accelerated more moderately (to 0.7% year-over-year, from -2.6%). This was the first positive print for construction investment in seven quarters. 

At the margin, momentum has gained significant strength. Even though seasonally-adjusted gross fixed investment fell 0.5% between March and February, quarter-over-quarter annualized growth increased to 15.1% in 1Q18 (from -2.5% qoq/saar in 4Q17). The firming up of momentum is observed across most components of GFI. Construction investment expanded 5.4% qoq/saar in 1Q18 (from 3.5% in 4Q17), boosted by residential construction (14.1% qoq/saar, 5% previously) which more than offset less dynamic non-residential construction (-4% qoq/saar, 4.8% previously). We note that a key difference between the construction component of gross fixed investment and the construction activity reported in industrial production data is that the former includes oil-drilling activities and the latter does not. Now, considering that construction industrial production is performing much better than construction investment (12.8% qoq/saar in 1Q18 versus 5.4%) we believe this is likely attributable to weak oil drilling. Turning to investment in machinery & equipment (33.3% qoq/saar in 1Q18, from -11.3% in 4Q17), both the imported component (26.6% qoq/saar, -1.9% previously) and the national component (38.3% qoq/saar, -24.5% previously) gained momentum.  

We expect the acceleration of gross fixed investment to be transitory. The public sector’s investment in physical capital (9.4 year-over-year in real terms in April, from 7.6% in 1Q18) indicate that construction investment might have not slowed down in the first month of 2018 (probably supported by reconstruction works) but the fiscal consolidation plan to reach a 0.8% of GDP primary surplus target by the end of the year will likely imply some adjustment in the next quarters. Likewise, nominal imports of capital goods only slowed down moderately in April (22.7% qoq/saar, from 31.3% in March). However, we expect that recent increase of uncertainty associated to NAFTA (with no deal yet, and deteriorated trade relations given the U.S. tariffs on steel and aluminum and Mexico’s retaliatory measures) and higher odds for AMLO of winning a majority in Congress will likely discourage private investment decisions.        

On another note, private consumption also accelerated in 1Q18, on the back of a stronger real wage bill. The monthly proxy for private consumption grew 1.3% year-over-year in March – dragged by the negative calendar effect of the Easter holidays – but 4.6% year-over-year according to calendar-adjusted data reported by INEGI, with growth of 2.8% year-over-year in 1Q18 (from 2.3% in 4Q17). At the margin, momentum also firmed as seasonally-adjusted private consumption advanced 1% between March and February, taking quarter-over-quarter annualized growth to 2.9% qoq/saar in 1Q18 (from 1.9% in 4Q17). We note that this sequential acceleration is also consistent with other private consumption indicators, such as retail sales and the Service sectors in GDP.  

We believe that the annual growth rate of the monthly proxy for private consumption will increase moderately in 2018 (compared to the 3% recorded in the previous year). The factors supporting retail sales are robust formal employment – which has grown at an average pace of 4.4% year-over-year in the first four months of 2018 (from an average of 4.3% in 2017) amid positive economic activity surprises –  and the substantial fall of inflation (which has translated into growing real wages, after four consecutive quarters of contraction). This, in fact, is also reflected into a much more dynamic real wage bill (9.9% qoq/saar in April, using nominal wages reported by the Mexican Institute of Social Security IMSS, from average growth of 2.9% qoq/saar in 2017). On the negative side, however, consumer confidence has weakened year-to-date (although there was some improvement in April and May) and remittances converted into pesos are less supportive (because of MXN appreciation) although they remain growing robustly in USD terms (and the recent weakening of the MXN will provide a boost).  

Alexander Müller

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