Itaú BBA - MEXICO – Domestic demand weakened in 1Q19

Macro Latam

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MEXICO – Domestic demand weakened in 1Q19

junio 21, 2019

Public and private spending weakened, while exports decelerated

Domestic demand weakened in 1Q19, dragged by both public and private spending, while exports decelerated (reflecting slowdown in the US economy). Aggregate supply grew 1.4% year-over-year, in line with median market expectations (as per Bloomberg) and down from 4Q18 growth rate of 2.7%. The figure was boosted by a positive calendar effect (Easter Holidays). In fact, according to figures adjusted by working days, reported by the Statistics Institute (INEGI), aggregate supply grew at softer pace (0.04% year-over-year, from 2.7% in the 4Q18), with both imports (-0.3%, from 5.6%) and GDP (0.2%, from 1.7%) weakening. In turn, domestic demand fell by 0.5% year-over-year in 1Q19 (from 0.8% in 4Q18). Looking at the breakdown, government’s consumption (-1.3%, from 0.3%) and public gross fixed investment (-10.6%, from -9.8%) contracted. Likewise, private demand decelerated, with both private consumption (0.2%, from 1.4%) and private gross fixed investment (-1.9%, from -0.8%) weakening. Finally, exports decelerated to 1.2% (from 3.9%), reflecting slowdown in the US economy.

At the margin, domestic demand improved, but momentum remained soft. Using seasonally-adjusted figures, the quarter-over-quarter annualized growth rate (qoq/saar) of domestic demand was 1.2% in the 1Q19 (from -2.0% in 4Q18). Private sector demand improved, with both consumption (1.0%, from -1.2%) and gross fixed investment (2.2%, from -2.2%) recovering somewhat. In turn, government consumption contracted further (-1.1%, from -0.1%), while public gross fixed investment improved (3.4%, from -25.9%). Finally, imports weakened (-7.7%, from 5.9%), while exports kept contracting (-0.7%, from -2.0%).

We expect 1.0% GDP growth for 2019, mainly due to weaker economic activity expected in the U.S. Uncertainty over the direction of domestic policy and trade relations with the U.S. will continue to weigh on investment. The government transition effect (reflected mainly in the fall of public investment) is also a downside risk to economic activity, in particular to construction output. In this context, employment is already weakening. On the other hand, recent inflation-adjusted wage increases are a buffer for activity, sustaining the real wage bill and smoothing the consumption slowdown.

Julio Ruiz

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