Mexican retail sales slowdown is approaching inflection point

February 27, 2018

We believe that retail sales growth hit a trough in 4Q17, and will likely firm up gradually during 2018.

Talk of the Day  


Mexico’s retail sales ended 2017 on poor footing, as inflation climbed again in the last months of the year (eating through real wages) and consumer credit slowed down (mainly due to higher domestic interest rates). The retail sales monthly indicator fell 2% year-over-year in December – closer to our forecast (-1.6%) than to median market expectations (-0.4%, as per Bloomberg) – which implies a contraction of 1.3% year-over-year in 4Q17 (from nil in 3Q17) and an almost sevenfold decrease of annual growth between 2017 and 2016 (1.3%, from 8.7%). According to calendar-adjusted data reported by the statistics institute (INEGI), the decline of retail sales in December was a bit smaller (1.5% year-over-year) than the headline number and the slowdown between 4Q17 and 3Q17 (-1% year-over-year, from 0.1%) was somewhat less pronounced. Sequentially, nevertheless, the momentum of retail sales is firming up which indicates the inflection point is nearby.

We believe that retail sales growth hit a trough in 4Q17, and will likely firm up gradually during 2018. The real wage bill will improve further, as inflation falls and the labor market remains tight. We see inflation decreasing to 3.7% by the end of 2018 (from 6.8% in 2017). Moreover, the strength of the U.S. economy (highly correlated to the Mexican business cycle) will continue to provide a robust inflow of remittances and boosting employment in tradable sectors and related services. The contraction of investment (dragged by the uncertainty associated to NAFTA and the elections), however, is a risk for the labor market. ** Full Story here.

Day Ahead: INEGI will announce January’s unemployment rate at 11:00 AM (SP Time). We expect the unemployment rate to post 3.4%, standing 0.2pp below the level recorded in the same month of last year. At the same time, INEGI will announce January’s trade balance. We expect the trade deficit to narrow.


Tax collection came at BRL 155.6 billion in January, above our call (BRL 149.0) and market expectations (BRL 148.2), with the surprise coming from tax amnesty programs (REFIS/PRT). Tax collection increased 10.1% y/y in real terms in the month. The recovery in tax collection reflected the improving economic activity, but was also influenced by higher fuel taxes and especially this month by the Refis/PRT program. Actually, the Refis/PRT added 7.9 BRL billion to this month’s result with a much higher than anticipated appliance on a modality that pays off all the remainder tax debts with the Federal Revenue Service in a single payment in January (4 BRL billion came from this effect). Hence, flows coming from the Refis will likely be lower in the coming months. Excluding revenues linked to tax amnesty programs, tax collection keeps a good pace, despite some cool down at the margin. Revenues increased 5.0% y/y in real terms in the month, with the 3-month moving average reaching 3.8%, from 5.1% in December. In 2018, tax collection will keep growing above GDP (1.2 elasticity), especially due to outperforming revenues that depend on consumption (PIS/COFINS, IPI) compared to more modest gains in revenues related to the wage bill (IRPF, social security) given the slower recovery in formal job market.

The current account deficit totaled USD 4.3 billion in January, narrower than our estimate (-USD 4.5 billion) and market consensus (-USD 5.0 billion). Over 12 months, the current account deficit receded to USD 9.0 billion or 0.4% of GDP. The seasonally-adjusted annualized three-month moving average advanced to USD 15 billion in January from USD 10 billion. The trade balance posted a USD 2.4 billion surplus, down somewhat from USD 2.5 billion in January 2017. The service deficit reached USD 2.8 billion, up from USD 2.4 billion one year earlier. On a seasonally-adjusted monthly basis, the service deficit increased just 0.6%. The income deficit shrank significantly to USD 4.1 billion from USD 5.3 billion in January 2017, due to the surplus in the profits and dividends account.

In the financial account, direct investment in the country (DIC) added up to USD 6.5 billion, topping by far our estimate (USD 3.5 billion) and market consensus (USD 3.8 billion). Equity capital transactions amounted to USD 3.7 billion and accounted for 57% of total DIC. DIC accumulated over 12 months slid to USD 65.3 billion (3.2% of GDP), but is still the biggest source of financing for the current account deficit. Foreign investment in the local capital markets was positive by USD 10 billion (driven by inflows of USD 6.0 billion to the fixed income market and USD 4.1 billion to the stock market).

All in all, the current account deficit remains low thanks to the good performance of the trade balance. A rebound in domestic demand tends to produce weaker readings in the coming years, but not to the point of compromising Brazil’s external sustainability. In terms of financing, DIC is smaller than in previous months, but still easily covering the current account deficit. Portfolio flows (to fixed income and stocks) were negative during most of 2017, but are now posting inflows over 12 months. ** Full Story here.

FGV has released its monthly survey covering the construction sector. Confidence in the sector fell 1.5% in February to 81.4, interrupting a sequence of 8 consecutive monthly increases. The result was driven by weaker expectations (-3.3%), while the current situation index rose 0.9%. Despite the decline, it is noteworthy that expectations are still well above the current situation index, suggesting that the aggregate index may resume its upward trend and the ongoing recovery in the sector may continue ahead.

Day Ahead: The central government primary result from January will be released during the day. Given the surprise in the tax collection and other available information, we now forecast a BRL 30 billion surplus (20.5 BRL billion previously). The Central Bank will publish January’s credit report at 10:30 AM (SP Time). BCB will auction up to 9,100 FX swap contracts (USD 455 million).


Day Ahead: The Central Bank will announce the reference rate during the day. It left its benchmark interest rate (7-day repo rate) unchanged at 27.25% in the previous meeting, following a 150-bp cut in January (75bps at each of the two monthly meetings). The board noted that it must be cautious in the accommodation of the monetary policy rate given the mixed signals from consumer prices and the increase in inflation expectations. We do not expect changes in the upcoming meeting, as inflation expectations are rising and the February CPI reading will likely be unfavorable, even though short-term Lebac’s rates are trading 50bps below the policy rate.

Fuente: ITAU

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