Mexico’s retail sales seem to have expanded strongly in June

The Mexican central bank’s August policy statement had an unexpected dovish remark on private consumption in the second quarter. In the light of the most solid retail sales growth in the history of the series, the Bank of Mexico’s remark possibly hints at the absence of a strong correlation between overall private consumption and retail sales, noted Societe Generale in a research report.

Last year, Mexico’s retail sales rose robustly by 5.1 percent due to the low base effect of 2014 and severe lower inflation. This trend accentuated sharply in 2016. Retail sales rose 7 percent year-on-year in the first quarter as inflation continued to decline.

“With inflation remaining low, we believe that retail sales will continue to surprise on the upside in the near term, leading us to forecast sales growth of 7.3 percent yoy in June (-0.2 percent mom) and a whopping 8.8 percent yoy in 2Q”, added Societe Generale.

Keeping aside the recent movements, low consumer sentiment and acceleration in inflation would ultimately result in lower consumption growth in the second half of 2016. After the impact of low inflation diminishes, any rise in private consumption would require support from the labor market. If the growth weakens because of lower exports and sluggish investment growth, and the labor market stagnates, consumption is expected to be impacted when inflation comes to normal levels, according to Societe Generale.