Itaú BBA - MEXICO – Retail sales weakened in 1Q17

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MEXICO – Retail sales weakened in 1Q17

May 23, 2017

We expect a slowdown of retail sales in coming quarters due to weaker fundamentals

Mexico’s retail sales weakened in 1Q17, in contrast with the broader services sector which remained robust. Retail sales expanded 6.1% year-over-year in March – above our forecast (5%) and market expectations (5.5%) – favored by a positive calendar effect (2 extra business days compared to March 2016) which added 2.1p.p. to growth. In fact, calendar adjusted data shows that retail sales expanded 3.4% year-over-year in March, leaving the growth rate of 1Q17 at 5.3% year-over-year (down from 9.9% in 4Q16). Granted, the spike of gasoline prices and the looting of retail stores affected the performance of retail sales in 1Q17. Actually, excluding fuels, oils & lubricants from the retail sales index, growth was 5.8% year-over-year in 1Q17 (which means that the “gasolinazo” had a first-order impact of 0.5p.p.).

The slowdown is more visible at the margin, with deteriorating momentum. Seasonally-adjusted retail sales fell 1.3% from the previous month, showing a quarter-over-quarter annualized contraction (-2.2% in 1Q17, from 6.7% qoq/saar in 4Q16) for the first time in four years.

We expect a further slowdown of retail sales in coming quarters. The solid performances of the broader services sector (4.1% qoq/saar in 1Q17) and the monthly private consumption indicator (6.4% qoq/saar in February) show that consumption remained resilient to the shocks, at least until 1Q17. Within the services sector, we note that financial & insurance, entertainment and professional services were particularly robust. However, in our view, the deterioration of fundamentals will likely be more visible in the consumption data in coming quarters. Annual inflation jumped to 5.8% in April (from 5.4% in March) and it has yet to peak (around 6.1% in August, according to our baseline scenario). The strength of formal employment has not been enough to offset the increase of inflation, so the real wage bill has been slowing down. Moreover, the labor market has to give in at some point. We believe formal employment creation will eventually weaken as investment slows down (dragged by fiscal consolidation, higher domestic interest rates, and the uncertainty surrounding bilateral relations with the US which puts investment decisions on hold).


Alexander Müller 



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