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22 March 2010

MEXICO The makeup of the recovery
We expect the strength of Mexico’s ongoing recovery to resemble that following the Tequila crisis, even if the relative trajectory of the individual GDP components will probably be more similar to that of the 2000-2001 cycle. Thus, we are not excessively concerned about the relative softness in domestic demand andbelieve that exports, along with US data, continue to hold the key to the activity outlook. Today’s surprising 1.8% y/y decline in January retail sales (Barclays Capital: +1.0%. consensus: +2.4%) makes it time to revisit the drivers of the recovery in Mexico as well as the potential risks to its materialization. In our view, there are several reasons why, even if undeniably a piece of bad news, thesoftness of the number should not be taken as too worrisome a risk. First of all, the soft print joins other indicators such as unemployment and IP, which took a breather in January. But based on employment figures, we expect the seasonally adjusted unemployment rate (due for publication this Thursday) to have returned to a declining trend in February (Barclays Capital: 5.68%, consensus: 5.75%).And based on car and US manufacturing data, we expect IP to have climbed 0.7% m/m that month. In other words, it looks to us that January was a soft month across sectors, and the retail sales numbers reflect just that. Even if the recovery in sales will likely be smoother than that of manufacturing output, this is only natural given the relatively more cyclical nature of the latter (Figure 1.)Second, we caution that, over a short period of time, retail sales usually turn out to be a rather mediocre predictor of aggregate consumption trends, as measured in national accounts data. As Figure 2 shows, consumption and retail sales have evolved similarly since 2003, as should intuitively be the case. But there are big mismatches in shorter time frames, with consumption expanding 5.6% q/q saarand 8.5% q/q saar in Q2 09 and Q3 09, while retail sales were still falling at the margin. Third, and most importantly, we believe the softness of retail sales data supports our long-standing view that Mexico’s recovery would be export led, with the revival in exports slowly but steadily boosting other GDP components just like it supported consumption in H2 09. More generally, we believe the ongoingsequential expansion of GDP during H1 10 continues to rely on net exports more than domestic demand. We expect the latter to pick up more gradually, with the improvement in labor market conditions and the recovery of credit supporting consumption, and the increase in capacity utilization and confidence in the outlook eventually sparking investment.
Jimena Zuniga +1 (212) 412 5361jimena.zuniga@barcap.com www.barcap.com


Barclays Capital | Title of Document Goes Here

Figure 1: Manufacturing more cyclical than sales
103 101 99 97 95 93 91 89 87 85 Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09 Jan-10 Retail sales
Source: Haver Analytics, Barclays Capital

Figure 2: Retail sales as a predictor ofconsumption over time
130 Q1 2003=100

February 2008=100 BarCap forecast

125 120 115 110 105 100 95 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Private onsumption
Source: Haver Analytics, Barclays Capital


Retail sales

Repeating history: 1995 or 2000?
What previous recessions and recoveries teach us

The recessions of 1995 and 2000 and their subsequent recoveries offer aremarkable contrast, which we believe can be informative vis a vis the strength and structure of the current bounce. Figures 3-5 show the evolution of real GDP, exports, investment, and private consumption, during the 1995, 2000, and 2009 recessions. On one hand, we highlight that the 2009 recession resembled the 1995 episode in its severity (as well as previous sharp contractions in the eighties, in...
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