Itaú BBA - MEXICO - Industrial production remained weak in 1Q17, in spite of stronger manufacturing

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MEXICO - Industrial production remained weak in 1Q17, in spite of stronger manufacturing

May 12, 2017

Solid manufacturing was offset by falling oil output and weaker construction.

Industrial activity began the year on a soft patch, with virtually nil growth in 1Q17. Industrial production expanded by 3.4% year-over-year in March, above our forecast (1%) and market expectations (2.2%, as per Bloomberg), favored by a positive calendar effect; that is, more working days, relative to March 2016, because the Easter holidays took place in April this year. In fact, adjusting for working days, growth was 0% year-over-year. Moreover, using the same data, industrial production contracted 0.1% year-over-year in 1Q17 (from nil growth in 4Q16). At the margin (seasonally-adjusted), growth was 0.1% from the previous quarter, and quarter-over-quarter annualized growth decreased to 0.2% (from 0.7% qoq/saar in 4Q16).

Solid manufacturing was offset by falling oil output and weaker construction. Using working-days adjusted data, manufacturing growth picked up to 3.4% year-over-year in 1Q17 (from 2.1% in 4Q16), keeping up the solid momentum observed over the past quarters (around 4% qoq/saar). In contrast, construction growth showed a meaningful deterioration in 1Q17 (to 0.5% year-over-year. from 3% in 4Q16), posting a quarter-over-quarter annualized contraction (-1.9% qoq/saar, 6% previously), which we believe reflects the weakening of investment. Meanwhile, mining activity fell 9.8% year-over-year, about the same as in 4Q16, and its momentum remained in negative territory (-4.9% qoq/saar, from -10.7% in 4Q16). Falling oil output is the main drag on mining activity.

We expect stronger manufacturing to lift industrial production in 2017, but there are downside risks. Oil output will likely continue to fall in the short-term, as PEMEX has slashed its capex and it will take time for the energy reform to bear fruits. On the construction side, the uncertainty surrounding bilateral relations with the U.S. is putting investment decisions on hold, and fiscal consolidation – which is taking a toll on non-residential construction – is yet to run its course. On the bright side, stronger U.S. industrial output and a competitive real exchange rate are already boosting the growth of Mexico’s manufacturing, which we believe will be the main buffer of the economy in 2017.


 

Alexander Müller