MEXICO—The Week Ahead

MEXICO—The Week Ahead. Slowing Investment and Contracting Economic Activity in October, Declining Industrial Production in November. Banxico will likely Cut the Monetary Policy Rate by 50bps to 7.75%
This week's data should continue showing the negative impact of the ongoing deterioration of the global and local growth outlook, stricter credit conditions and poorer consumer and business confidence on economic growth indicators. In this context, together with recent government actions (fiscal stimulus package and freezing of gasoline prices), and public comments from top officials on growth and inflation, it is highly likely that the central bank initiates the easing cycle this week.

Gross fixed investment (GFI) likely increased by 3.2% y/y in October (7.7% y/y in Oct 07 and 7.9% y/y 3MMA) mainly because of a sharp deceleration in capital good imports (13.4% y/y vs. 25.5% y/y 3MMA) and construction activity (-2.9% y/y vs. -1.2% y/y 3MMA). Moreover, sluggish growth in investment in domestic machinery and equipment (3.4% y/y vs. 11.1% y/y 3MMA) likely added downward pressure to GFI. Therefore, investment probably expanded by 6% YTD during the Jan-Oct 08 period vs. 6.1% YTD in 10M07. The Bloomberg consensus expects investment to expand by 4.3% y/y.
Moreover, economic activity, as measured by IGAE, likely declined by 0.7% y/y in October (5% in Oct 07 and 1.6% y/y 3MMA). A sharp contraction in industrial production (-2.7% y/y), along with worsening consumer spending indicators (waning consumer confidence, raising unemployment, elevated inflation and declining retail sales) likely dragged economic activity into negative territory. Moreover, a rapid deceleration in the external sector (exports plus imports: -1.2% y/y vs. +15% y/y 3MMA) and slowing lending growth should have added downward pressure to overall activity. Consequently, economic activity probably expanded by 2% YTD (Jan-Oct 08) vs. 4.1% YTD during the same period in 2007. The Bloomberg consensus expects IGAE to decline by 0.2% y/y.
In terms of monetary policy, Banxico will likely cut the monetary policy rate by 50bps to 7.75% (60% probability) because economic activity is decelerating sharply and inflation pressures and expectations will likely dissipate in the very near term. The other option is that the committee takes a more conservative approach and cuts rates by 25bps to 8%. Overall, recent economic activity data indicates that growth is under heavy downside pressure as a result of contracting external demand and the ongoing decline of domestic demand conditions. Moreover, lower commodity prices and the widening of the output gap, along with the government announcement that it will freeze gasoline prices, should bring inflation closer to the target by year end. However, inflation risks associated with the impact of a further weakening of the local currency plays in favor of the more conservative approach. Finally, recent actions (fiscal stimulus package) and comments from President Calderon, Central Bank Governor Ortiz, and Finance Minister Carstens, indicate a concern for economic growth and improved view on inflation. The Bloomberg consensus expects Banxico to cut the reference rate by 25bps to 8%.
Finally, industrial production probably contracted by 2.7% y/y in November (2.2% y/y in Nov 07 and -2.2% y/y 3MMA). Declines in US manufacturing (-7.4% y/y), imports of intermediate goods (-9.2% y/y) and auto production (-2.8% y/y) should have further deteriorated manufacturing output (-3.4% y/y), while a contraction in oil production should have kept mining output in negative territory (-4.2% y/y). Furthermore, construction likely continued falling but at a slower pace (-0.5% y/y), and utilities likely remained sluggish (1.1% y/y). In the first 11M08 period, industrial output likely contracted by 0.2% YTD (1.8% YTD in 11M07). The Bloomberg consensus expects industrial production to decline by 3.3% y/y.