Mexico: Partly cloudy sky in H2 2017 - HSBC

Alexis Milo, Chief Economist at HSBC, notes that the Mexican economy expanded solidly during H1 2017, prompting continuous upwards revisions from consensus for the first time in several years. However, we have started to see signs pointing to a more modest performance in H2, he further adds.

Key Quotes

“We maintain our 2.1% y-o-y GDP growth forecast for 2017, considering that the 2.3% y-o-y growth registered in H1 gives room to meet our forecast despite the expected slowdown in the remainder of 2017. We previously saw some upside risks to our current forecast, but now risks look more balanced.”

“With an improved business environment reflected in less volatility and better figures for Manufacturing PMIs in Mexico, we expect the positive momentum of Mexican exports to continue. Nonetheless, we are expecting to see lower growth rates in manufacturing exports in H2, as they will face higher comparison bases and a stronger MXN than in the same period last year. If these materialise, the growth rate in overall industrial activity may decline further, as manufacturing output has offset the weakness of other components. In fact, the outlook for construction looks weaker, as the public component is likely to remain subdued as the government contemplates further spending cuts in 2018. Meanwhile, prospects for mining are still gloomy, as government oil production estimates for the remainder of 2017 and for 2018 are unlikely to change significantly.”

“Given this backdrop, services and private consumption are set to remain the primary drivers of growth. However, we think that some challenges such as higher inflation, lower real wages and higher comparison bases may obstruct some channels of consumption in the remainder of 2017. In fact, we think these elements are behind the deceleration in retail and auto sales as well as in the more modest credit growth rates.”  

“Inflation has continued to climb due to a combination of factors. Core inflation has continued to feel the pressure from the FX pass-through into food merchandise and services prices, which has not ceased despite recent Mexican peso appreciation. Also, the high volatility in the non-core component, due to temporary shocks in non-processed food, has put additional pressure on the overall CPI. However, given that we see a slightly more contained FX pass-through, we expect a softer path for inflation, in line with our 6.5% y-o-y estimate for end-2017. We also maintain our view that inflation will start receding in 2018, ending at 3.8% y-o-y.”