Itaú BBA - MEXICO – Soft domestic demand in 3Q19

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MEXICO – Soft domestic demand in 3Q19

Dezembro 23, 2019

Private gross fixed investment deteriorated further

Domestic demand kept contracting in 3Q19. Aggregate supply contracted 0.3% year-over-year, but above median market expectations of -0.5% (as per Bloomberg) and up from 2Q19 growth rate of -1.0%. Aggregate supply grew at a similar pace using calendar adjusted figures (-0.3%), with both imports (-0.3%, from 0.6%) and GDP (-0.3%, from 0.1%) deteriorating. In turn, final domestic demand fell by 1.0% year-over-year in 3Q19 (practically the same rate from 2Q19).  Within domestic demand, aggregate public demand improved, but kept contracting (-3.8%, from -4.2%), with  government’s consumption and public gross fixed investment at -2.0% (from -2.4%) and -10.6% (from -12.1%), respectively. In turn, aggregate private demand deteriorated to -0.6% in 3Q19 (from -0.4% in 2Q19), with private consumption expanding at a soft pace (0.8%, from 0.7%), while private gross fixed investment (-5.8%, from -4.4%) deteriorated further. Finally, exports grew 3.4% year-over-year in 3Q19 (from 2.8% in 2Q19). 

At the margin, domestic demand expanded at a soft pace in 3Q19. Using seasonally-adjusted figures, final domestic demand contracted 0.1% quarter-over-quarter in 3Q19 (from -0.4% in 2Q19). Within domestic demand, government demand contracted 0.7% in 3Q19 (practically unchanged from 2Q19) as the improvement in public  gross fixed investment (0.1%, from -2.9%) was offset by a contraction of 0.8% (from -0.2%) in government consumption. The recovery in gross fixed public investment is associated to an improvement in public capital expenditure execution (reflecting a gradual fade away of the transition government effect on fiscal expenditure). Meanwhile, private demand remained weak (-0.1%, from -0.3%), with private consumption expanding 0.6% (from 0.5%), while private gross fixed investment fell sharply (-2.5%, from -3.4%). Finally, exports decelerated to 0.6% quarter-over-quarter in 3Q19 (from 2.7% in 2Q19), reflecting more clearly a slowdown effect in Mexico’s manufacturing sector from the deceleration in U.S. economy.

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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