Itaú BBA - MEXICO – Gross fixed investment was weak in July, amid fiscal consolidation and NAFTA risks

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MEXICO – Gross fixed investment was weak in July, amid fiscal consolidation and NAFTA risks

October 4, 2017

The outlook for investment is clouded by negative risks

Gross fixed investment – currently the weakest component of domestic demand – surprised to the downside in July, mainly dragged by the fiscal consolidation. The monthly GFI indicator fell 2.5% year-over-year, undershooting our forecast and median market expectations (0.9% and 1.4% contractions, respectively, as per Bloomberg). According to calendar-adjusted data reported by the statistics institute, gross fixed investment also contracted 2.5% year-over-year, with the three-month moving average contraction rate standing at 0.7% year-over-year (unchanged from June).

At the margin, momentum has improved a bit, from the depressed levels of 1Q17. Seasonally-adjusted gross fixed investment fell 1.5% month-over-month in July, but quarter-over-quarter annualized growth actually increased to 1.9% (from 1.2% qoq/saar in June). Construction investment moderated its contraction (-1% qoq/saar in July, -3.5% in June), with residential construction (-0.5% qoq/ssar, 2.9% previously) now performing worse than non-residential construction (-0.2% qoq/saar, -5.5% previously). We note that construction investment – unlike the construction data reported in industrial production – includes oil drilling activities, which considering the recent stabilization of oil & gas output (barely falling by 1.5% qoq/saar in July, after contracting at an average pace of 6.5% qoq/saar in 1H17 and 9.3% in 2016) likely supported non-residential construction. On the investment in machinery & equipment side, quarter-over-quarter annualized growth decreased to 3.8% (from 5% qoq/saar). This decrease was explained by the further deterioration of investment in national machinery & equipment (-18.6% qoq/saar, -6.2% previously) – probably associated to the import substitution effects of MXN appreciation (12% year-to-date) – which more than offset the strength of investment in imported machinery & equipment (19.9% qoq/saar, 14.3% previously).

The outlook for investment is clouded by negative risks, so we expect growth to remain weak in 2017. Year-over-year growth will likely continue in negative terrain, while the sequential improvement observed recently will reach a peak soon (and stay subdued thereafter).In the short-term, fiscal consolidation and uncertainty associated to NAFTA (which intensified recently, with the next renegotiation round – scheduled on October 11 – expected to address some of the thorniest issues) will probably continue hurting investment. Moreover, the proximity of the presidential elections (which could affect business confidence, given the lead of the left-wing candidate in the polls) could put investment decisions on hold, depending on the evolution of the polls. On the positive side, the solid U.S. economy encourages capital expenditures in Mexico, so this can act as a cushion. Looking into 2018, we believe that the uncertainty associated to the presidential elections will be partly offset by a number of factors: reconstruction works (in response to the earthquakes), a less severe fiscal drag (budget cuts proposed in 2018 budget bill are much smaller compared to those in the 2017 budget), and a successful conclusion of NAFTA renegotiation in 1Q18 (by successful we mean an acceptable compromise, favoring the U.S. but without transformational implications for the Mexican economy).


Alexander Müller


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