Economic Analysis - Uncertainty Tempering Growth Expectations - JUNE 2017

BMI View: Real GDP growth in Mexico will decelerate in 2017, dragged down by uncertainty over trade relations with the US and the ongoing liberalisation of fuel prices. We have also lowered our 2018 growth forecast, as political risk will temper growth momentum next year as well.

Mexican real GDP growth will slow to 1.6% (from 1.9% previously) in 2017 due to uncertainty over US-Mexico trade relations and the continued liberalisation of gas prices. The private consumption was highly supportive of headline growth in 2016, while the fixed investment lagged, driving real growth of 2.3%, above our 2.1% estimate ( see ' Quick View: Solid Growth In 2016 ' , February 24). However, households will not provide the same support to economic activity in 2017, as high inflation and interest rates will subdue spending. The initial liberalisation of gas prices on January 1, which saw retail fuel prices rise by 14-20% across the country, floored consumer confidence and has started to feed through to retail sales.

With the move to market-determined fuel prices taking place in five phases over the course of the year, it will have knock-on effects for inflation and consumption. We see the inflationary impact gradually fading, with price growth slowing from 4.9% y-o-y in February to 4.2% at end-year. Similarly, we see only one more 25 basis points (bps) increase in the benchmark rate this year, bringing it to 6.75%, following 350bps of hikes since December 2015 ( see ' Monetary Tightening Coming To An End ' , February 15). Nevertheless, these factors will see real private consumption growth slow to 1.9% in 2017 following 2.8% growth in 2016.

Sales Outperformance Coming To An End?
Mexico - Retail Sales & Consumer Confidence Index
Source: Bloomberg, INEGI, BMI

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