Itaú BBA - MEXICO – GDP weakened in 1Q19

Macro Latam

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MEXICO – GDP weakened in 1Q19

mayo 24, 2019

Industrial and services sectors weakened

GDP weakened in 1Q19, dragged by the industrial sector, while services sector decelerated.  Mexico’s monthly GDP proxy (IGAE) expanded 1.3% year-over-year in March (from 1.1% in February), slightly above median market expectations (1.2%, as per Bloomberg) – which implied a GDP growth of 1.2% year-over-year in the 1Q19 (revised down from the 1.3% flash estimate, announced by the Statistics Institute three weeks ago and from 1.7% in the 4Q18). GDP in the 1Q19 was boosted by a positive calendar effect (Easter holidays). In fact, using calendar adjusted figures GDP grew at slower pace (0.2% in the 1Q19, from 1.7% in the 4Q18).  Looking at the breakdown, the industrial sector was the main drag to economic activity, decreasing 2.0% year-over-year in the 1Q19 (from -0.9% in the 4Q18), with mining contracting (-7.6%, from -7.3%) due to the fall in oil output, the manufacturing sector falling by 0.1% (from 1.5%), reflecting slower growth in the US manufacturing sector and the construction sector falling by 2.3% in the 1Q19 (from -2.2% in the 1Q19), associated to a delay in public capital fixed investment expenditure execution. Likewise, services sector decelerated to 1.0% in the 1Q19 (from 2.7% in the 4Q18), while primary sector accelerated to 5.8% (from 2.9%). GDP excluding primary sector and mining output decelerated to 0.4% year-over-year in the 1Q19 (from 2.1% in the 4Q18), also adjusted by calendar effects.

At the margin, GDP contracted in 1Q19. Seasonally-adjusted GDP fell by 0.7% (annualized) in the 1Q19 (from 0.1% in 4Q18). Looking at the breakdown, also with qoq/saar figures, primary sector grew to 10.7% in the 1Q19 (from 11.6% in the 4Q18), while services sector contracted for the first time since 3Q17 to 0.7% (from 1.5% in 4Q18). In turn, industrial sector decreased 2.2% qoq/saar in the 1Q19 (from -4.9% in the 4Q18), with mining decreasing 5.3% (from -15.0% in the 4Q18), while manufacturing sector fell by 1.7% (from -1.5%). Importantly, GDP excluding primary sectors and mining output contracted 0.8% qoq/saar in the 1Q19 (from 0.6% in 4Q18).  

We expect economic activity to slow to 1.4% in 2019, from 2.0% in 2018. While we note that one-off factors could be behind part of economic weakness in early 2019, uncertainty over the direction of domestic policy and the approval of the USMCA by the U.S. Congress will continue to weigh on investment. In this context, employment is already weakening. On the other hand, recent real wage increases are a buffer for activity, sustaining the real wage bill and smoothing the consumption slowdown. 

Julio Ruiz

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