Mexico GDP: Slower growth path pushes back rate hike expectations

Mexico's GDP expanded by 0.5% q/q sa in Q2 15. This number was lower than our above-consensus forecast (0.9%, consensus: 0.4%) on the back of a strong performance in services (0.9%) offset by a flat print in industrial activities (0.0%) and a contraction in primary production (-1.6%). In annual terms, GDP increased 2.2%. Although forecast was optimistic relative to the market, wait for the actual number to adjust, GDP projections was best option ,as it has implications for 2016 growth and monetary policy.

"We now expect the economy to expand by 2.2% y/y in 2015 and 2.4% y/y in 2016 on the back of a softer growth path ahead, from 2.6% and 3.1%, previously. Even though the services sector has been growing at a solid pace, this was likely driven by electoral spending in H1 15. Accordingly, we expect a deceleration of this sector in H2 as this positive effect fades. Moreover, manufacturing might also decelerate as the uncertainties of global growth could keep global trade rather depressed. Finally, oil production should stabilize and the construction sector could start growing, albeit at a very slow pace", says Barclays.

Against this backdrop, it is expected that, Banxico will wait until December 17 to hike. As inflation remains at historical lows and a slower growth path implies more time for demand side pressures to arise, it is believe that, Banxico will be reluctant to hike in September (also considering that the probability of a Fed hike is also lower). Moreover, FX volatility persists, though it has not contaminated the rates markets and it is likely that Banxico would prefer to increase FX intervention than to increase rates for FX stabilization.

"There should be some pass-through to CPI in H2 15, though we believe there is room to accommodate this and that it should therefore not affect inflation expectations for 2016, reducing the need to rush a hiking cycle" notes Barclays.