The Mexican central bank’s August monetary policy statement had a surprisingly dovish remark regarding the second quarter private consumption. In light of the strongest retail sales growth in the history of the series, Bank of Mexico’s remark likely hints at the lack of solid correlation between overall private consumption and retail sales.
However, it is difficult to believe that the continued strength of the labor market, historically low inflation and rising retail sales would not lead into a solid second quarter consumption number. Retail sales rose robustly last year by 5.1 percent, owing to the low base impact of 2014 and sharply lower inflation.
The trend was highlighted sharply in 2016, growing 7 percent annually in the first quarter and 9.5 percent year-on-year in the second quarter as inflation continued to surprise on the downside. With inflation continuing to stay low and the labor market sustaining moderate improvement for now, there is possibility that retail sales would continue to surprise on the upside in the near term, resulting in anticipating sales to grow 8.4 percent year-on-year in July, said Societe Generale in a research note.
Keeping recent movements aside, consumer sentiment has dropped in recent months. Furthermore, inflation is likely to accelerate from current levels in the remainder of 2016 and in 2017. Both the factors are expected to result in lower consumption growth in the second half of 2016. After the impact of low inflation diminishes, any acceleration in private consumption would require support from the labor market. If the economic growth softens and the labor market stagnates, consumption might take a hit when inflation comes back to normal levels, added Societe Generale.
