Itaú BBA - MEXICO – Industrial production weakened significantly in July

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MEXICO – Industrial production weakened significantly in July

September 11, 2017

Construction is performing poorly

Mexico’s industrial production surprised to the downside in July, with a pronounced deterioration of construction activity (which reflects the weakness of investment). Industrial production fell 1.6% year-over-year, undershooting our forecast (0.6%) and median market expectations (-0.2%, as per Bloomberg). According to calendar-adjusted data reported by the statistics institute (INEGI), the contraction was also 1.6% year-over-year, pulling down the three-month moving average growth rate to -0.6% year-over-year (from nil in June).   

At the margin, the momentum of the manufacturing sector – which was the engine of industrial production over the past quarters – lost traction. In July, seasonally-adjusted industrial production fell 1% from the previous month, with quarter-over-quarter annualized growth dropping to -2.3% (from -1.3% qoq/saar in June). The breakdown of the index shows that manufacturing weakened (-0.4% qoq/saar, 0.2% previously); mining output moderated its contraction pace (-3.2% qoq/saar, -4.3% previously); and construction posted a sharper quarter-over-quarter annualized contraction (-4.1% qoq/saar, -4.3% previously) than mining, for the first time in almost two years.   

We expect a sequential improvement of industrial production in coming quarters. Manufacturing exports will likely be boosted by firmer U.S. activity. Oil output seems to be bottoming out, so mining (largely oil) will no longer represent such a big drag on industrial output. In fact, 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 (submitted by the Ministry of Finance to Congress last Friday). Moreover, the moderation of the uncertainty surrounding the Mexican economy – with more clarity on the future course of the NAFTA renegotiation and more optimistic views from the rating agencies (S&P, Fitch and HR revised Mexico’s credit rating outlook to stable, from negative) – will likely curb the slowdown of investment, and thus give some support to the construction sector. An important risk for investment (and construction), however, is the proximity of the presidential elections (July 2018), which could affect business confidence down the road.    

 

Alexander Müller




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