Itaú BBA - MEXICO – Domestic demand momentum remained weak in April

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MEXICO – Domestic demand momentum remained weak in April

julio 5, 2019

Lingering uncertainties surrounding Mexico’s economy will weight on investment outlook

Gross fixed investment (GFI) contracted in April. The monthly GFI fell by 5.7% year-over-year in April, below our forecast of -4.0% and broadly in line with market expectations (-5.6%, as per Bloomberg). The monthly figure was partly dragged by a negative calendar effect (Easter Holidays). Still, adjusting by working days, GFI kept contracting (-2.5% year-over-year in April, from -6.0% in March), taking the quarterly growth rate to -3.5% year-over-year (from -2.2%). Looking at the breakdown, also with calendar adjusted figures, construction investment fell by 2.2% year-over-year in the quarter ended in April (from -0.8% in March), dragged by both residential and non-residential construction investment, while Machinery & Equipment investment decreased 5.3% (from –4.3%).

At the margin gross fixed investment weakened in the quarter ended in April, dragged by construction investment. With seasonally adjusted figures, the quarter-over-quarter annualized rate (qoq/saar) deteriorated to -2.4% in April (from 6.8% in March). Within GFI, construction investment contracted 6.7% qoq/saar in April (from 4.6% in March), dragged by both residential and non-residential construction. In turn, Machinery & Equipment spending expanded 8.7% qoq/saar in April (from 13.0% in March and a sharp 20.4% contraction in 4Q18). 

On another note, private consumption expanded at a below trend pace in April. The monthly proxy for private consumption increased by 0.2% year-over-year in April (from 0.6% in March). The monthly figure was also dragged by a negative calendar effect. Adjusting by working days, private consumption grew at a faster rate (1.3%), but growth remained at a below trend pace, taking the quarterly growth rate to 0.8% year-over-year (from 1.2%).

At the margin, private consumption momentum remained weak.  Using seasonally-adjusted figures, private consumption increased 1.3% month-over-month in April (from -1.5% in March), taking the quarter-over-quarter annualized growth rate to -1.6% in April (from 0.4% in March).

We expect economic activity to slow to 1.0% in 2019, from 2.0% in 2018. Uncertainty over the direction of domestic policy and trade relations with the US will weight on investment outlook. Moreover, weaker U.S. economic growth will likely keep growth below potential. In the short term, lower public spending is also playing against activity. In this context, employment is weakening. On the other hand, recent real wage increases are a buffer for activity, sustaining the real wage bill and can smooth the consumption slowdown ahead.
 

Julio Ruiz



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