Macro Analysis /
Global

Mexico: Ahead of Curve

  • CPI in 1H-September up 0.32% 2w/2w (8.71% y/y), pressured once again by food items both at the core and non-core

  • We expect July’s Timely Indicator of Economic Activity to be revised upwards, while signs for August are more negative

  • Other indicators to be released include 2Q22 aggregate supply and demand and July’s retail sales

Juan Carlos Alderete Macal
Juan Carlos Alderete Macal

Director of Economic Research

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Francisco Jose Flores Serrano
Francisco Jose Flores Serrano

Senior Economist, Mexico

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Banorte
15 September 2022
Published byBanorte

Inflation would continue to be impacted by food items at the beginning of September

  • Inflation (1H-September). We expect headline inflation at 0.37% 2w/2w. As has been a constant in recent periods, dynamics would continue to be mostly unfavorable, with additional pressures on goods –particularly on food items–, although with a moderation in energy, which we expect to have positive effects in the price formation process in coming months. In this context, we anticipate the core at +0.43% 2w/2w (contribution: +32bps), with the non-core more modest at 0.17% (+5bps). With these estimates, annual inflation would stand at 8.71% from 8.70% on average in August. The core would continue to extend its upward trend to 8.27% (previous: 8.05%), while the non-core would moderate to 10.05% (previous: 10.65%)

  • Timely Indicator of Economic Activity (August). This release will include the first estimate for August, as well as revised figures for July. For the latter month, industrial production surprised to the upside relative to the first estimate. Moreover, timely signals for services –especially retail sales– leads us to believe that the adjustment will be to the upside. Hence, we could see a sequential expansion in the month. Turning to August, signals are relatively more negative. Despite an additional decrease in contagions, challenges related to inflationary pressures remained, dampening dynamism of domestic demand. On top of this, we must consider more adverse conditions abroad, with additional evidence of a US deceleration. As such, timely indicators such as IMEF’s PMIs and ANTAD sales moderated at the margin

Proceeding in chronological order...

The Timely Indicator of Economic Activity will probably point to some weakness in August. This release will include the first estimate for August, as well as revised figures for July. We recall that June’s mid-point forecast stood at 2.1% y/y (using sa figures), higher than the 1.8% in the GDP-proxy (IGAE). For the latter month, industrial production surprised to the upside relative to the first estimate. Moreover, timely signals for services –especially retail sales– leads us to believe that the adjustment will be to the upside. Hence, we could see a sequential expansion in the month. Turning to August, signals are relatively more negative. Despite an additional decrease in contagions, challenges related to inflationary pressures remained, dampening dynamism of domestic demand. On top of this, we must consider more adverse conditions abroad, with additional evidence of a US deceleration. As such, timely indicators such as IMEF’s PMIs and ANTAD sales moderated at the margin.

Weekly international reserves report. Last week, net international reserves decreased by US$180 million, closing at US$198.3 billion. This was mainly explained by a positive valuation effect in institutional assets. Year-to-date, the central bank’s international reserves have fallen by US$4.1 billion.

Aggregate demand likely kept climbing in 2Q22, boosted by better domestic conditions. We expect both aggregate supply and demand at 3.6% y/y. From the supply side, we already know that GDP grew 2.0% y/y, extending the recovery trend for a third consecutive quarter. Inside, dynamism was centered in both industry and services.

Meanwhile, we anticipate imports at 7.9% y/y, accelerating from the 5.8% of the previous quarter. Converting trade balance data to MXN at current prices, inbound shipments of goods picked up 29.2% y/y, with the current account –also including services– stronger at 29.7%. This is slightly higher than when figures are expressed in USD as the Mexican peso fell 0.3% on average in annual terms. Nevertheless, we expect overall growth to be impacted once again by inflationary pressures, which accelerated sharply and should widen the gap even further between figures in nominal and real terms.

On demand, private consumption would remain quite strong at 5.6%, with a boost from services and the imported component. The monthly indicator grew 7.1%, with imported goods leading gains (+18.7%), but with services (+9.4%) also benefitting from a further normalization in activity. As such, fundamentals were mostly better throughout the period, with remittances’ strength likely key to offset some of the negative effects from the suspension in social programs payments. Investment was more resilient than anticipated, coming in at 7.0%. The boost came mostly from machinery and equipment (+13.6%), especially the imported component, while construction (+1.6%) was supported by non-residential activity. We expect government spending at +0.8%, with relative stability on electoral spending. In this context, while current government expenditures rose 7.4% y/y, we expect a heavy drag from inflation and a continuation of the trend of a lower effect on value added. Lastly, we anticipate exports at 9.8%. Similar to shipments abroad, differences between the trade balance and the balance of payments were tight, suggesting that services broadly grew at the same pace as goods, as shown in the current account report. We consider this would be quite positive given prevailing disruptions to trade in the period.

If we are correct, domestic demand would have continued to strengthen despite prevailing challenges from abroad, mainly domestic consumption. As such, we expect this to continue for the rest of the year, albeit most likely at a slower pace as headwinds seem to have gathered force. Nonetheless, these conditions are still consistent with our view of an expansion of 2.1% in GDP this year.

Retail sales to rebound in July, boosted by a better backdrop. We estimate them at +4.2% y/y, better than the 4.0% of the previous month. Sequentially, sales would return to expansion at +0.5% m/m, erasing the 0.3% loss from the previous month, which in our view would be positive. Specifically, some of the factors that would have contributed to additional dynamism include: (1) The resumption of payments from social programs after the electoral ban; (2) a moderation in COVID-19 cases in the latter part of the month; and (3) no disruptions from sales campaigns in the previous month.

So far, available data is mixed. ANTAD sales gathered pace, with total stores up to 5.6% y/y in real terms (previous: 2.1%) and same-stores at 3.3% (previous:  -0.1%), even despite additional price pressures. Gasoline sales decelerated to 700kbpd from 721kbpd in the previous month. However, we attribute this mostly to a seasonal effect, considering less trips as kids did not go to school because of the summer holiday. On a more negative note, auto sales moderated to 90.0 thousand units, which translates to a 6.8% m/m contraction. Lastly, non-oil consumption goods imports fell 0.2% m/m, its first decline in 10 months. One thing we should factor-in is that these figures are measured in nominal terms, which given the decline in the price of commodities and transportation costs, might not be as negative as it seems. On fundamentals, news were more favorable. Remittances maintained remarkable strength, adding a third month above $100 billion and reaching a new historical high. Employment was relatively favorable with +8.6 thousand new positions, albeit with notable seasonal drivers distorting figures. Lastly, consumer loans kept gathering pace, which might be a useful tool for families to smooth-out consumption.

We believe this result supports our view that June was only a bump in the road to recovery, with growth likely resuming from here onwards. However, risks remain, including persistent price pressures and a possible slowdown in the pace of the recovery of economic activity.

Core inflation for the 1st half of September still pressured by food, but with slowdown in energy. We expect headline inflation at 0.37% 2w/2w. As has been a constant in recent periods, dynamics would continue to be mostly unfavorable, with additional pressures on goods –particularly on food items–, although with a moderation in energy, which we expect to have positive effects in the price formation process in coming months.

In this context, we anticipate the core at +0.43% 2w/2w (contribution: +32bps), with the non-core more modest at 0.17% (+5bps). With these estimates, annual inflation would stand at 8.71% from 8.70% on average in August. The core would continue to extend its upward trend to 8.27% (previous: 8.05%), while the non-core would moderate to 10.05% (previous: 10.65%).

At the core, and as we already mentioned, goods would be the highest at 0.5% 2w/2w (+20bps), highlighting processed foods at +0.7% (+15bps). We think that these continue to adjust to accumulated increases in input prices, on top of the fact that some of the retail stores could be gradually applying the increases announced by producers in previous periods (e.g. Coca-Cola Femsa, Bimbo, Lala, etc.). On other goods (+0.3%; +5bps), seasonality is more favorable, with adjustments in school supplies probably left behind. Regarding services (+0.4%: +12bps), education would climb 2.4%, considering that tuition fees in basic education are usually adjusted in this period. On others (+0.1%; +2bps) dynamics would be more mixed, with stability on tourism categories, but with the effect related to last wills’ discounts being offset by additional pressures on other items, highlighting restaurants. Lastly, housing would be more modest at +0.2% (+2bps).

In the non-core, agricultural prices would remain under pressure at +0.8% (+9bps). On this occasion, the expansion would be concentrated in meat and egg (+0.9%; +6bps), with reports of rises in the price of chicken and eggs after a moderation in the previous fortnights. Meanwhile, fruits and vegetables are expected to climb more modestly by +0.6% (+3bps), with our monitoring showing declines in bananas and avocados, although with signs of increases in tomatoes. In energy (-0.5%; -5bps), we expect declines in LP gas (-1.4%; -3bps) and in low-grade gasoline (-0.4%; -2bps). Although we saw decreases in reference prices of both, the adjustment in the latter would be limited by the reduction in the government stimulus. Electricity would also be lower (-0.2%; 0bps), although moderate after a more substantial decrease in the first half of August. Finally, government tariffs would rise 0.1% (+1bps).