Summary
Remittances should continue to dip gradually through to the 4Q07, before they normalize in line with baseline expectations for US GDP overall. We are confident that there is more resilience and flexibility in Mexican consumer spending markets, particularly in the core food, beverage, and retail sectors, than formal metrics can capture.
Analysis
Will consumer spending in Mexico soon be on the decline? Three sets of numbers released this year raised that possibility. In March, the Central Bank of Mexico published official US remittance inflows at US$1.7 billion, down from a high of US$2.6 billion in May 2006. In April, preliminary 1Q07 estimates for the United States GDP growth were 1.3%, the weakest in four years. Consensus forecasts expect growth averaging out to 2.5% for the year overall. The Federal Reserve added fuel to the fire by deciding against lowering interest rates at its May meeting, citing concerns over core inflation.
These numbers have set off worries in Mexican business and economic circles that declining remittance flows, a side effect of slowing US growth, would have immediate and detrimental effects on the Mexican economy particularly on the burgeoning consumer sector. Adding to the overall macro slowdown has been the impact of the US housing market crash on new home starts and, consequently, the sudden drop in demand for migrant labor in the residential construction market.
Mexico's economic fortunes are tightly aligned to US markets—80% of Mexico’s exports are sold in the US, and remittances rank second only to oil as a share of GDP—and as a result it is likely to feel the effects of a US economic slowdown. However, remittances are simply leveling off, coming down from the highs generated by the US housing bubble. As long as remittance transfers decline in a controlled, gradual deceleration, and don’t suddenly spiral downward, we are still looking at a normal economic cycle.
Remittances should continue to dip gradually through to the 4Q07, before they normalize in line with baseline expectations for US GDP overall. In the short term, we expect a mild tightening of core consumer demand, before consumer spending levels off in line with baseline expectations in 1Q08.
We are confident that there is more resilience and flexibility in Mexican consumer spending markets, particularly in the core food, beverage, and retail sectors, than formal metrics can capture. There are several explanations for this. First, remittance flows are famously counter-cyclical to begin with. Moreover, we think the dip is over-weighted in the formal, recorded remittance sector, which makes up less than 50% of total transfers. The informal sector has been more resilient in the face of slowing growth. Third, access to credit is making rapid headway in Mexico, giving consumers the ability to finance purchases in an unprecedented manner.
The slowdown in US housing starts has had a contained and incremental impact on the migrant labor market (given the prominence of Mexican labor in the construction industry), but the current buzz in the mainstream economic press as overstated. Remittance earners are an extremely fluid, agile, skilled population, and the US labor market is still incredibly tight. All other things begin equal, in the medium to long term, demand for migrant labor, skilled and unskilled, will outpace supply. We predict a lag time of two or three quarters at most while any displaced labor is redeployed, and subsequently, only a short-term impact on household and consumer spending in Mexico.
