Aggregate supply and demand grew 2.6% yoy in 4Q23, above our forecast of 2.2%, but broadly in line with market consensus of 2.5% (as per Bloomberg). At the margin, using seasonally adjusted figures, aggregate supply and demand registered a soft sequential expansion of 0.3% qoq/sa, explained mainly by slower GDP growth (0.1% in 4Q23, from 1.1% in 3Q23) while real imports of goods & services stood at 0.4%. Domestic demand also slowed to 0.6% qoq/sa in 4Q23 (from 1.8% in 3Q23) but it is still expanding at a resilient pace. Looking at domestic demand breakdown, private consumption grew at a still decent 0.9% qoq/sa in 4Q23, while public investment expanded at 1.7%. The main drag to domestic demand in 4Q23 was private investment (-0.3%).
Our take: The main take away of today’s economic release is the resilience of domestic demand (especially private consumption) in the last quarter of 2023, despite a weaker GDP growth. This becomes relevant in a context where activity will likely be boosted, in 1H24, by an expansionary fiscal stance and some Banxico board members have expressed concerns about the persistence of services inflation. External demand will also be supportive for activity in 2024 (we expect GDP growth of 2.8%). Our base case remains for the central bank to start cutting its policy rate this Thursday with a 25-bp cut, at a constant pace during the rest of the year (our end of year policy rate is at 9.50%). However, we cannot rule out pauses amid lingering risks to inflation.
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