We foresee a slowdown of growth in 2018
Mexico’s GDP growth slowed down to 2% in 2017 (from 2.9%) and the GDP proxy began 2018 growing around the same pace. The GDP proxy (IGAE) expanded 2.2% year-over-year in January, above our forecast and median market expectations (both 2%, as per Bloomberg). According to calendar-adjusted data reported by the statistics institute (INEGI), growth was lower (1.2%) but the three-month moving average growth rate picked to 1.7% year-over-year (from 1.6% in December). Looking at the same metric (3mma calendar-adjusted), services output accelerated slightly (to 2.6% year-over-year, from 2.5%), industrial output moderated its contraction (to -0.5% year-over-year, from -0.8%), and the volatile primary sectors (mostly agriculture) slowed down (3.5% year-over-year, from 4.9%).
At the margin, the momentum of activity improved. Even though the seasonally-adjusted GDP proxy fell 0.7% from December, quarter-over-quarter annualized growth jumped to 4.4% (from 3.7% qoq/saar in December). Although the qoq/saar print is being affected by a low base of comparison (due to natural hazards), over the past three months month-over-month growth averaged 4.0% annualized. Moreover, the firmer momentum is observed across the board: services (3.9% qoq/saar, from 3.7% in December), industries (2.1% qoq/saar, from 0.5%), and primary sectors (12% qoq/saar, from 10.1%). Within industrial output, it is worth highlighting the recovery of mining (mostly oil) to 5.9% qoq/saar (from -1.2% in December) which is the first positive quarter-over-quarter annualized growth rate in almost two years. Likewise, construction (7% qoq/saar, from 3.3%) and manufacturing (0% qoq/saar, from -0.7% qoq/saar) also gained traction.
We expect GDP growth to slow down to 1.8% in 2018, from 2% in 2017, mainly dragged by falling investment (which, on the supply-side, should be reflected on weaker construction). The factors playing against activity are the uncertainties associated to NAFTA and elections (which put investment decisions on hold) and tight macro policies (both fiscal and monetary). On the buffer side, however, the acceleration of the U.S. will likely boost Mexican manufacturing exports, falling inflation will support real wages (and probably prevent a further slowdown of consumption), and smaller budget cuts (relative to 2017) will imply a smaller fiscal drag on the economy.