Itaú BBA - MEXICO – Retail sales slowdown is approaching inflection point

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MEXICO – Retail sales slowdown is approaching inflection point

February 26, 2018

Fall of inflation will boost real wage bill in coming quarters

Mexico’s retail sales ended 2017 on poor footing, as inflating climbed again in the last months of the year (eating through real wages) and consumer credit slowed down (mainly due to higher domestic interest rates). The retail sales monthly indicator fell 2% year-over-year in December – closer to our forecast (-1.6%) than to median market expectations (-0.4%, as per Bloomberg) – which implies a contraction of 1.3% year-over-year in 4Q17 (from nil in 3Q17) and an almost sevenfold decrease of annual growth between 2017 and 2016 (1.3%, from 8.7%). According to calendar-adjusted data reported by the statistics institute (INEGI), the decline of retail sales in December was a bit smaller (1.5% year-over-year) than the headline number and the slowdown between 4Q17 and 3Q17 (-1% year-over-year, from 0.1%) was somewhat less pronounced.   

Sequentially, nevertheless, the momentum of retail sales is firming up which indicates that the inflection point is nearby. Even though seasonally-adjusted retail sales fell 0.5% from November, we note that quarter-over-quarter annualized growth increased to 2.1% in 4Q17 (from a 2.6% qoq/saar fall in 3Q17 and an average contraction rate of 0.1% qoq/saar in the first half of 2017). This is consistent with the sequential pick-up of the real wage bill (4.6% qoq/saar in 4Q17), as formal employment growth remained robust throughout 2017 and seasonally-adjusted annualized inflation fell substantially between 1H17 and 2H17 (in spite of the increase observed in the last two months of the year, which more than reversed by February 2018). 

We believe that retail sales growth hit a trough in 4Q17, and will likely firm up gradually during 2018. The real wage bill will improve further, as inflation falls and the labor market remains tight. We see inflation decreasing to 3.7% by the end of 2018 (from 6.8% in 2017). Moreover, the strength of the U.S. economy (highly correlated to the Mexican business cycle) will continue providing a robust inflow of remittances and boosting employment in tradable sectors and related services. The contraction of investment (dragged by the uncertainty associated to NAFTA and the elections), however, is a risk for the labor market. 

Alexander Müller


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