Itaú BBA - MEXICO – Industrial production lost momentum in April

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MEXICO – Industrial production lost momentum in April

June 11, 2018

The impulse from construction moderated

After showing signs of improvement in 1Q18, the recovery of industrial production seems to have lost strength in April. The monthly industrial production indicator grew 3.8% year-over-year in April – above our forecast and median market expectations (both 3.6%, as per Bloomberg) – inflated by a big positive calendar effect (i.e.: more business days because of the non-overlapping Easter holidays). In fact, according to calendar-adjusted data reported by the statistics institute (INEGI), industrial production grew a weak 0.1% year-over-year in April, with the three-month moving average growth rate standing at 0.2% year-over-year (from 0.1% in March). Also looking at 3mma calendar-adjusted numbers, as shown in the chart below, we note that mining output (mostly oil) fell more sharply (-6.3% year-over-year in April, from -5.9% in March), construction remained growing at the same pace (2.7%), and manufacturing accelerated slightly (1.3% year-over-year, from 1.2%). 

At the margin, momentum weakened (mainly for construction and mining). In April, seasonally-adjusted industrial production fell 0.4% from the previous month, pulling down quarter-over-quarter annualized growth to 1.4% (from 2.7% qoq/saar in March, which was actually the highest print in over two years). Notably, the strong rebound of construction activity in 1Q18 (11.7% qoq/saar, from 2.5% in 4Q17), likely explained by temporary reconstruction works (post-natural disasters), moderated in April (to 5.4% qoq/saar). Likewise, mining output also lost momentum (-6.8% qoq/saar in April, from -0.9% in March). Manufacturing, in contrast, gained traction (3.4% qoq/saar in April, from 2.5% in March).   

We expect a gradual acceleration of industrial production – both sequentially and in year-over-year terms – in coming quarters, driven by stronger manufacturing exports (boosted by the pick-up of the U.S. economy) and the stabilization of oil output. Conversely, we believe that construction activity will deteriorate. Construction surprised to the upside in 1Q18, likely driven by reconstruction work (matching a substantial acceleration of public investment), but it is bound to moderate assuming the government wants to meet the 0.8% of GDP primary surplus target set for 2018 (from 0.4% of GDP in 2017, excluding the Central Bank’s windfall dividend). More importantly, the more severe uncertainties associated to NAFTA (with the parties missing to reach an agreement before Mexico’s elections) and the presidential elections will curb private investment (and construction activity, from a supply perspective).  

 

Alexander Müller



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