Mexico: Solid growth in services GDP, constant unemployment

The Mexican economy expanded 0.1% m/m sa in May according to the IGAE index. This number came in stronger than the expectations, since it was estimated of 0.5% contraction, mainly as a result of the decline observed in the industrial production in that month. The economy grew 1.5% y/y and 2.1% by adjusting calendar effects, surprising the markets on the upside (Consensus: 1.2%).

"We maintain our 2.6% y/y growth forecast for the year. After this report, our GDP tracker for Q2 stands at 0.7% q/q sa as we expect IP to increase 0.3% m/m sa in June (our current forecast is 0.9%). Only a strong negative surprise in the GDP report of that month should put our forecast on the downside. Finally, the services sector is consolidating a solid growth path since it has been growing close to 3.0% 3m/3m saar since November 2014, and this suggest that the output gap of the economy is probably concentrated at the industrial level", says Barclays.

The unemployment rate marginally increased to 4.41% sa in June from 4.35% in the previous month but under higher participation. It was expected, unemployment rate decline to 4.30% (consensus 4.34%) but it is partially explained by an increment in the participation rate in 15bp reaching 59.68% in sa terms. Taking the quarterly average, unemployment practically remained flat at 4.4% from the figure observed in Q1. This performance might be partially explained by the persistent stagnation of industrial production as construction is a labor intensive sector.

Banxico is still facing a dilemma that, the recent inflation dynamics, domestic conditions would suggest that Banxico should remain on hold for a couple of months until to start observing an acceleration of inflation and stronger economic activity, particularly in construction. However, the recent MXN depreciation could raise concerns about future inflation pressures combined with the fact that services activities are probably getting closer to their potential and wage pressures in that sector might be observed sooner than expected. In any case, it is very likely that Banxico will leave the reference rate unchanged this next July 30 but it might react to a Fed action likely happening in September, which is still the base case scenario, notes Barclays.