Macro Analysis /

Mexico: Ahead of the Curve

  • We estimate a slight decline of 0.1% q/q in 4Q21 GDP, with services failing to gather steam and industry slightly down

  • Full-year 2021 remittances expected at US$51.6 billion, a new historical high

  • Other releases include GFI, private consumption (Nov), banking credit (Dec), consumer confidence and IMEF PMIs (Jan)

Juan Carlos Alderete Macal
Juan Carlos Alderete Macal

Director of Economic Research

Francisco Jose Flores Serrano
Francisco Jose Flores Serrano

Senior Economist, Mexico

29 January 2022
Published byBanorte

Low economic momentum likely in January

  • Gross domestic product (4Q21 P). We forecast GDP at 0.9% y/y, translating into a slight sequential decline of 0.1% q/q. We believe several challenges persisted, including supply chain disruptions, price pressures, and challenging weather. By sectors, we expect primary activities at 0.0% q/q (4.2% y/y), industry at -0.1% (+1.2% y/y) and services at -0.6% (0.1% y/y)

  • IMEF’s PMIs (January). After significant strength in December, we expect both indicators to reverse gains given the global and local impact from the spread of Omicron. Specifically, we see manufacturing falling 2.0pts to 50.6pts, with non-manufacturing more impacted (-3.1pts) to 49.4pts, back to contraction for the first time in almost a year. Overall, we think short-term risks for the economy are to the downside, with the virus still affecting companies and consumers alike, but also because of less global growth –especially in the US– and persistent price pressures, among the most relevant factors

Proceeding in chronological order...

4Q21 GDP to post a mild sequential decline. We forecast GDP at 0.9% y/y. This translates into a slight sequential decline of 0.1% q/q using seasonally adjusted figures. Nevertheless, it would still be quite disappointing after the contraction seen in the third quarter. Moreover, we highlight an improvement in epidemiological conditions after a strong deterioration in the previous period. Hence, we believe several challenges persisted, including: (1) Supply chain disruptions that impacted manufacturing further; (2) increasing price pressures, having an effect not only in consumption-related categories, but also in construction; and (3) some idiosyncratic factors and challenging weather, impacting crops. By sectors, dynamics would also be mostly negative. We expect primary activities at 0.0% q/q (4.2% y/y), with industry at -0.1% (+1.2% y/y)  –dragged by construction, after previous strength–. Lastly, services would be the weakest at -0.6% (0.1% y/y). If our estimate materializes, full-year GDP would come in at 4.7% y/y, impacted by a weaker-than-expected performance through 2H21. In addition, it would also imply that the economy is around 3.5% below pre-pandemic levels.

Considering that activity in October and November is known thanks to the GDP-proxy, we focus our attention on December. For this month, our GDP forecast implies +0.5% m/m (0.6% y/y). This would be supported by broad signs of a recovery, aided by stable virus conditions and more modest price pressures. As such, this would be better than the latest estimate from INEGI’s Timely Indicator of Economic Activity. Industry would rebound modestly, boosted by manufacturing and construction. Within the former, the signal from IMEF’s manufacturing PMI was positive, rising to 52.6pts. The trade balance was slightly more mixed, as strength in ‘other’ manufacturing exports was partly dampened by weakness in autos (albeit only after climbing significantly in November). The latter contrasts with AMIA figures, as auto production rose nearly 10.0% m/m. In construction, sentiment indicators extended higher, and while price pressures continued, it might show a slight increase after recent relevant weakness. Lastly, mining would backtrack slightly, as timely data from CNH points to a moderation in output volumes of both crude oil and natural gas.

In services, we expect the upward momentum seen in November to continue, albeit at a more modest pace. In broad terms, IMEF’s non-manufacturing also rose to 52.6pts. By sectors, signals for retail are favorable, with ANTAD sales in real terms improving on a year ago basis despite higher inflation. In our view, this was driven by better fundamentals (including employment and likely remittances) and higher mobility. Moreover, anecdotal evidence for the tourism sector seems better, especially considering the holiday season. Also, air passenger traffic in private airports surpassed pre-pandemic levels (2019). Turning to more essential sectors, we could see an additional recovery in professional and support services, similar to November, albeit only after a rout of weakness in previous months. Remaining categories might be more modest. In the primary sector, we expect a modest sequential decline as weather reports were less favorable, but also on a very difficult base effect.

Banking credit to extend its recovery in December. We anticipate a 3.7% y/y decline in banking credit to the private non-financial sector, better than the -4.6% seen in the previous month. We believe the improvement would be explained by: (1) A more favorable base effect; (2) better fundamentals, increasing demand for credit; and (3) an additional uptick in business confidence. Nevertheless, given challenges for greater dynamism in economic activity, the improvement might be relatively modest. Meanwhile, the effect from inflation would be quite negligible, with a 1bp gain vs. the previous month, at 7.36%. In the detail, consumer loans would stand at -2.6%, with a larger improvement in corporate, to -5.7%. Lastly, mortgages would be somewhat more stable at 2.4%.

Weekly international reserves report. Last week, net international reserves decreased by US$104 million, closing at US$202.0 billion. According to Banxico’s report, this was mainly explained by a negative valuation effect in institutional assets. Year-to-date, the central bank’s international reserves have fallen by US$404 million.

Resilient remittances on seasonality amid virus risks. We expect remittances at US$4,789.2 million, gathering pace at the margin and still strong in annual terms, up 31.2%. With this, full-year 2021 inflows would stand at US$51,622.8 million, up 27.1% y/y and a new historical high. In this sense, remittances have remained very resilient throughout the year. Seasonally, the month is better than November, in our view related to year-end holidays. Moreover, we believe higher COVID-19 cases due to Omicron may have induced additional efforts to send resources, despite data showing that the acceleration in Mexico’s contagions occurred until late in the period and early January.

On the US labor market, data is mixed. On the positive side, the unemployment rate among Hispanics fell to 4.9% from 5.2% in November, matching the decline (in basis points) for the overall population. This is a new post-pandemic low and is only 50bps above the level in February 2020. Nevertheless, and according to our calculations, figures for working-age Mexicans –including ‘natives’, ‘non-native citizens’, and ‘non-citizens’ (legal or illegal)– were significantly weaker. Specifically, the unemployment rate surged to 7.6% from 4.9% previously. Looking at the details, unemployed people increased by 462.3 thousand, coupled with a reduction of 170 thousand in the labor force.

We admit these figures are difficult to reconcile with overall employment dynamics, but in our view should provide some caution about the trend in inflows, especially as the pace of growth has shown a significantly higher pace. On migration news, the Biden administration had to reimpose the so-called ‘Remain in Mexico’ policy to comply with a federal court order. In addition, border crossings by foot for non-essential travel were reopened in November. Although these may well have influenced these figures, we can’t be sure about their impact. Hence, we will watch closely to upcoming data to gauge if a trend is established. Lastly, the US economy decelerated at the end of last year, which could have been an additional headwind. For example, ISM indicators declined at the margin, while retail sales and industrial production also showed sequential contractions.

We remain optimistic about remittances this year as we think the US economic recovery will continue. Nevertheless, risks have been rising due to virus dynamics’ and price pressures, among others. Moreover, the administration’s Build Back Better plan seems very unlikely to be approved, limiting the potential fiscal impulse. In this respect, we adjust our full-year 2022 forecast slightly lower to around US$56.5 billion, which would be close to a 9.5% y/y advance.

Banxico’s survey of economic expectations. As usual, market participants will focus on inflation, growth, reference rate, and exchange rate forecasts. In the first, analysts expect 2022 year-end inflation at 4.2% y/y, lower than our 4.4%. Given that it is still early in the year, adjustments on this and other short-term estimates (like those for 2023 and 12-months ahead) might be modest. Meanwhile, we do not expect significant moves in medium and long-term expectations, still above target. On GDP, 2021 stands at 5.6%, likely to be revised lower given latest data, with 2022 at 2.8%.

The current view about the YE22 reference rate is that it will reach 6.25%, lower than our +150bps forecast, to 7.00%. However, since the last survey was taken before the December 16th meeting and after other developments, it will likely be adjusted higher. Finally, the year-end exchange rate stands at USD/MXN 21.65 (Banorte: 21.80).

IMEF indicators to show broad weakness in January. After significant strength in December, we expect both indicators to reverse gains given the global and local impact from the spread of Omicron. Specifically, we see manufacturing falling 2.0pts to 50.6pts, with non-manufacturing more impacted (-3.1pts) to 49.4pts, back to contraction for the first time in almost a year.

In manufacturing, data suggests renewed challenges. Markit’s PMI in the US fell to 55.0pts from 57.7pts in the previous month, a 15-month low. According to the report, supply chain problems and labor shortages worsened, while demand softened –likely on higher prices and uncertainty–. Output nearly stalled, with companies dealing with inventory management and new sales growth held back. Although there were some signs of cost inflation waning, new export orders rose modestly as they were also affected by COVID-19 restrictions in other markets. Locally, auto sector plant stoppages continued. For example, Volkswagen closed temporarily its Puebla plant in the first two weeks of the year and announced less shifts until the end of the month. Nissan closed its Morelos plant as part of corporate strategy changes, but also on the lack of chips. In our view, all components will drop, led by ‘inventories’ and ‘deliveries’, albeit also weak in ‘production’ and ‘employment’.

In non-manufacturing, we expect a more meaningful decline. Several headwinds likely affected, such as high core inflation –with relevant adjustments in processed foods, other goods and some services–, lingering weakness in activity and mixed employment results. Nevertheless, the key driver should be the deterioration in COVID-19 cases, which decisively hit our country until this month. Although the government kept activities open, reports of labor absenteeism affecting several industries were prevalent. For example, airlines had to cut scheduled trips on contagion of pilots and flight attendants. According to IMSS data, 171 thousand authorizations were granted for paid leave because of COVID-19 between January 10th and 27th, by far the highest on record for a similar period since the pandemic started. 

Overall, we think short-term risks for the economy are to the downside, with the virus still affecting companies and consumers alike, but also because of less global growth –especially in the US– and persistent price pressures, among the most relevant factors.

Consumer confidence to contract modestly in January. We expect confidence at 44.1pts (seasonally adjusted), lower than the 44.5pts in December. We believe the deterioration in the epidemiological backdrop –with new highs in daily cases– led to a moderation in mobility, likely impacting activity. Price pressures continued, as turn-of-the-year adjustments and tax updates took place, even despite some favorable trends in key categories such as LP gas and fresh fruits. On the contrary, a possible offsetting factor for these developments is the new minimum wage, rising 22% to $172.87 per day, likely boosting household and purchasing power components.

Investment to rebound modestly in November. We expect GFI at 7.8% y/y (previous: 6.5%). The result would come after two months in contraction, in a backdrop of lingering economic weakness. In this sense, the GDP-monthly proxy IGAE advanced modestly in sequential terms (0.3%) after three consecutive prints surprising to the downside. Our estimate implies a 1.0% m/m rebound, albeit not enough to reach the levels seen in August. Apart from a less challenging base effect, we think better COVID-19 dynamics helped at the margin. In business confidence, the ‘adequate moment to invest’ component rose in all categories except for manufacturing, which inched lower. 

By sectors, machinery and equipment should be stronger, at 1.5% m/m (15.8% y/y). We expect a sizable improvement in the imported component, up 3.1%. Capital goods imports in the trade balance saw renewed strength (+4.1%), likely helped by recent efforts in the US to reduce shipment delays in key ports (e.g. Los Angeles, Long Beach, among others) and other developments locally –such as the end of roadblocks in the state of Michoacán–. Nevertheless, high inflation is likely still distorting figures. On average, the exchange rate was a little weaker at 20.90 per dollar (October: 20.46), although weakening significantly during the second half as it reached up to 21.93 on the 26th. In turn, signals about the domestic component were positive sequentially, especially in autos. Moreover, machinery and equipment in IP rose 0.3% m/m.

Despite of this, construction will probably remain a drag, down 0.5% m/m (+1.6% y/y). This would be the third consecutive decline, with the sector in industrial production dipping 0.6% m/m. In the detail, edification was down 0.2%, civil engineering grew 0.3% and specialized works –not accounted for in GFI– contracted 3.2%. Regarding the former, reports have abounded about complications due to the steep increase in raw material prices, affecting the profitability of ongoing and planned projects, among other factors. On the other hand, the government has been calling for an acceleration in key infrastructure projects, which in our view keeps supporting the non-residential sector. Nevertheless, this would not be enough to compensate for the headwinds experienced by the private sector.

Unfortunately, conditions for investment have complicated at the margin. We highlight that raw material prices remain very high, interest rates are expected to climb as central banks combat inflation –with rates markets already incorporating a sizable adjustment this year–, and economic growth prospects decline due to Omicron. We are still waiting for the third package of public-private investment initiatives, which were going to be unveiled this month according to President López-Obrador. All in all, we still see investment as lagging other components of aggregate demand, still limiting GDP growth.

Mixed signals for consumption in November, although still likely up. After a small gain in the previous month –0.2% m/m–, we expect private consumption to show a sequential advance for a fifth month in a row. Nevertheless, given accumulated gains of 1.5% in the same period, we cannot rule out a modest setback. Fundamentals kept improving, with positive results in remittances (despite unfavorable seasonality), employment and credit. Signals from activity were relatively favorable, with a modest advance. Retail sales maintained good dynamism as they grew 0.9% m/m. Services within the GDP-proxy were up 0.5%, with all categories higher except one (healthcare and education). Similarly, non-oil consumption goods imports added a third month positive at +1.9% m/m. Nevertheless, increasing price pressures represent a high a risk given that, due to advances in the period’s inflation, real wages have been affected, impacting consumption capabilities. Going forward, the trend seems to have remained favorable, although with higher uncertainty due to the latest wave of contagions.