Itaú BBA - MEXICO – Monthly GDP deteriorated in October

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MEXICO – Monthly GDP deteriorated in October

Dezembro 24, 2019

Services and industrial output were the main drags to economic activity

Monthly GDP was below market expectations in October. Mexico’s monthly GDP proxy (IGAE) contracted 0.8% year-over-year in October (from +0.1% in September), below our forecast of -0.2% and market expectations of -0.6% (as per Bloomberg). According to calendar adjusted figures, monthly GDP contracted at a similar pace (-0.8% year-over-year in October, from -0.3% in September), taking the annual quarterly growth rate to -0.6% in October (from -0.4% September). Looking at the breakdown, also using calendar adjusted figures, the annual quarterly rate of the industrial sector deteriorated further (-2.0% in October, from -1.7% in September), with mining improving, but still contracting to 2.9% (from -4.2%), while construction sector remained weak (-6.9%, practically unchanged from September). In turn, manufacturing sector slowed to -0.2% in the quarter ended in October (from 0.8% in September). Finally, services sector annual quarterly growth rate weakened to -0.1% in October  (from a null growth in September). GDP excluding primary sector and mining output contracted 0.7% in the quarter, also adjusted by calendar effects.

At the margin, monthly GDP deteriorated in October. GDP contracted 1.1% qoq/saar in October (from -0.6% in September), dragged by industrial output (-2.0%, from -2.1%) and services sector (-0.5%, from 0.1%). Within industrial production,  manufacturing (-4.0% qoq/saar in October, from -0.5% September) deteriorated further, while mining  (9.7%, from 5.8%) and construction (-7.6%, from -12.0%) output improved, but with construction still contracting. The improvement in the mining sector is associated to some recovery in the oil output, while weakness in the U.S. economy is weighing more clearly on Mexico’s manufacturing sector, which – given the openness of the economy – will spill over to other sectors. Importantly, GDP excluding primary sectors and mining output contracted 1.6% qoq/saar  in October (from -0.9% in September).  

We expect GDP to contract 0.1% in 2019 and to gradually recover to 1.1% in 2020. Uncertainties over the direction of domestic policy are weighing on investment, while the slowdown in the U.S. economy will likely continue to curb exports and manufacturing production. On the other hand, the fading effect of the government transition on fiscal spending and the likely approval of the USMCA in the U.S. Congress (reducing uncertainty) should support some recovery in 2020.  Moreover, if the recent stabilization of oil output lasts, the mining sector would also contribute to a GDP growth improvement in 2020.

Julio Ruiz

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