Economic Analysis - Growth To Decelerate On Services Slowdown - SEPT 2017

BMI View: Persistent weakness in the industrial sector and a slowdown in the services sector will contribute to a deceleration in Me xican real GDP growth in 2017. However, w e have revised up our 2017 forecast in light of a strong Q117 growth print and highlight continued upside risks.

Mexican real GDP growth will slow in 2017 before picking up only moderately in 2018. Uncertainty over trade relations with the US and a general election in July 2018 are likely to keep fixed capital investors cautious, subduing growth in the industrial sector. Service sector growth will also moderate, with high inflation eating into consumers' purchasing power and nominal interest rates for consumers still likely to head higher in the months ahead, subduing spending. These factors are unlikely to ease significantly in 2018. However, a strong Q117 real GDP growth print (2.8%) suggests upside risks to our 2017 forecast persist. We have upwardly revised our forecast for real growth to 1.8% in 2017 (from 1.6% previously) and maintain our 2018 forecast at 2.0% ( see ' Quick View: Upside Risks To Growth As Tertiary Sector Proves Resilient', May 1). The services sector has been the major driver of growth since 2016 and we cannot rule out that it continues to perform above our expectations.

With persistent uncertainty over the future of the US-Mexico trade relationship, and its attendant implications for economic growth, we believe that service sector growth will slow in the quarters ahead. Strong January and March economic activity readings for the tertiary sector, which were the major driver of the robust Q117 growth print, suggest that consumers may have frontloaded some of their spending for this year. This was enabled by robust remittance growth, perhaps as Mexicans employed in the US sent money home in order to avoid any potential restrictions implemented on transfers under the Trump administration.

Tertiary Outperformance Likely On Borrowed Time
Mexico - Real GDP By Output, %
Source: Banxico, BMI

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