Itaú BBA - MEXICO – Industrial production deteriorated in October, in spite of vanished natural hazards

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MEXICO – Industrial production deteriorated in October, in spite of vanished natural hazards

December 12, 2017

Momentum weakened across-the-board for industrial sectors

Mexico’s industrial production surprised to the downside in October, with falling mining and construction activities partly offset by growing manufacturing output. Industrial production fell 1.1% year-over-year, significantly below our forecast and median market expectations (expansions of 1% and 0.8%, respectively, as per Bloomberg). According to calendar-adjusted data reported by the statistics institute (INEGI), the fall was slightly larger (1.2% year-over-year), pulling down the three-month moving average contraction rate to 0.8% year-over-year in October (from 0.6% in September). Looking at the same metric (calendar-adjusted 3mma), we note that most sectors contracted – specifically, mining (-11.4% year-over-year, -10.7 previously) and construction (-1.2% year-over-year, unchanged) – except for manu facturin g (3.1% year-over-year, 3.5% previously). We were expecting a stronger performance of industrial production mainly because the natural hazards (hurricanes and earthquakes) – which battered the economy in September – had vanished in October.  

At the margin, momentum weakened across the board for industrial sectors. In October, seasonally-adjusted industrial production fell 0.1% from the previous month, posting a quarter-over-quarter annualized contraction of 2.1% (from a 2.2% qoq/saar fall in September). The breakdown of the index shows that manufacturing growth slowed down to 1.7% qoq/saar (from 2.3% in September). In contrast, mining (-21.1% qoq/saar, -18.3% previously) and construction (-1.7% qoq/saar, 0.4% in September) contracted. Notably, the quarter-over-quarter annualized contraction rate of mining fell deeper into negative territory, in spite of the 4.7% month-over-month gain (driven by oil & gas, which accounts for the bulk of mining). In fact, oil & gas output rebounded 8.4% month-over-month, after the natural hazards (particularly detrimental for oil production areas) took d aily ave rage output to a record-low in September (with data available since the early 1980s). 

We expect a gradual acceleration of industrial production – both in sequential and year-over-year terms – in coming quarters, mainly driven by the positive effects of firmer U.S. activity on Mexico’s manufacturing exports. In fact, the U.S. ISM manufacturing index is hovering at strong levels, and U.S. industrial production (deeply interconnected with Mexico’s manufacturing sector) is gaining traction. Moreover, the fiscal consolidation – which has negative effects on both oil output (through the reduction of PEMEX’s capex) and construction activity – will be much smaller in 2018 than in the previous two years, according to the 2018 budget bill. Two important risks, however, are the growing uncertainty about NAFTA and the presidential elections, which could put investment decisions on hold (and thus hurt construction activity). 

 

Alexander Müller



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