Itaú BBA - MEXICO – Private consumption remained robust in July, supported by labor market

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MEXICO – Private consumption remained robust in July, supported by labor market

October 5, 2017

Real wage bill growth will likely accelerate in coming months

The monthly proxy for private consumption was solid in July, decoupling from retail sales (which weakened during the same month); the former indicator is broader than the latter, and – importantly – correlates better to consumption in GDP. The monthly proxy for private consumption grew 2.9% year-over-year in July. This indicator is not tracked by Bloomberg, so there is no reference for market expectations. According to calendar-adjusted data reported by the statistics institute, growth was slightly higher (3.1% year-over-year), with the three-month moving average growth rate standing at 3.6% year-over-year (from 4.2% in June).  

At the margin, private consumption gained traction in 2Q17, which might be related to the fact that the seasonally-adjusted real wage bill bottomed out in 1Q17 (and showed a sequential acceleration thereafter). Consistent with resilient activity, formal employment has grown at a strong pace throughout 2017, cushioning the slowdown of the real wage bill (dominated by the sharp increase of inflation). In 2Q17, however, seasonally-adjusted annualized inflation began to fall, causing a rebound of the real wage bill (as shown in the second chart). That being said, we note that the level of seasonally-adjusted private consumption was unchanged from June, but quarter-over-quarter annualized growth increased to 4% qoq/saar in July (from 3.5% in June). Looking at the breakdown, the consumption of national goods & services picked up to 3.7% qoq/saar in July (from 3.3% in June), with the services component (5.1% qoq/saar, 5.2% previously) performing much better than the goods component (1.6% qoq/saar, -0.5% previously). Moreover, the consumption of imported goods continued expanded vigorously (9.4% qoq/saar in July, 12.6% in June) probably because of the import substitution effect associated to the Mexican peso’s appreciation (12% year-to-date).

 Although a temporary slide is likely in September (because the earthquakes disrupted activity in six states which account for one third of the economy), we expect private consumption growth to recover quickly – both in year-over-year and sequential terms – and stay solid, underpinned by the acceleration of the real wage bill and the recent improvement of consumer confidence. A recent survey conducted by the statistics institute estimated that 40% of businesses (from the affected states) closed their doors for at least one day (and 16% of businesses in Mexico City shut down for more than three days). Therefore, it is highly likely that September will be a bad month. Nevertheless, looking beyond this temporary headwind, the growth of consumption will be supported by the acceleration of the real wage bill. In fact, inflation is already falling, and we expect employment growth to remain robust (as the acceleration of the U.S. economy supports job creation in Mexico). Moreover, consumer confidence showed a meaningful improvement in September (seasonally-adjusted up by 1% month-over-month and 6% year-over-year). An important risk, however, is the proximity of the presidential elections (with the left candidate, Andrés Manuel López Obrador, leading the polls) which could affect private investment (and, consequently, job creation).     

Alexander Müller

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