Mexico’s consumption likely to remain strong in Q2 on solid growth in retail sales

Mexico’s retail sales are likely to have expanded in April. It is expected to have grown 6.6 percent year-on-year; however, the seasonally-adjusted rate is likely to have dropped 1.2 percent on sequential basis after growing sharply by 3 percent in March, said Societe Generale in a research report. Retail sales are likely to remain strong in the second quarter to keep driving consumption growth.

Last year, retail sales expanded robustly due to low base effect of 2014 and lower inflation. The strong trend was seen again in the first quarter of this year where retail sales grew 7 percent year-on-year as inflation continued to decelerate.

However, the correlation between the overall consumption growth and retail sales is not strong enough. Retail sales had successfully anticipated consumption growth in 2014-2015, but had been unsuccessful in anticipating in 2011-2012. Keeping the recent movements aside, easing consumer sentiment and accelerating inflation should result in lower growth of consumption in the second half of 2016.

When the impact of low inflation recedes in 2016, rise in private consumption will require help from the labor market. If the economic growth weakens because of subdued exports and investment growth and results in a labor market stagnation, consumption is expected to be affected when inflation comes back to normal levels later in 2016.