Since the beginning of the year, news reports have referred to the 2017 Mexican crisis: the Trump effect, the uncertainty about future relations with the US and the rocketing peso.
On daily basis these facts have been influencing the mood of Mexicans and triggering a response from more than three out of four consumers who believe their family economy is suffering from the crisis effect.
Despite GDP growth slowing down by the end of 2016 (2,2%), the Mexican economy has continued to grow in 2017, but is still far from 2016 goals. However, if we look beyond Mexico, the Latin American overview shows that it is not just Mexican, but also the Brazilian and Argentinian economies that are struggling against difficult economic situations (the countries recorded -3,5% and -1,8% GDP decline respectively).
Therefore, a key question to answer is if Mexico as Latam 2nd economy would be facing a challenging 2017 for FMCG spend. We anticipate the answer as ‘No’.
But, why? There are three key indicators to evaluate if any country’s FMCG spend is at risk or about to challenge shopping behavior in the short term: firstly, the unemployment rate; secondly, the rate of inflation vs. salary variation; and finally, local currency vs US dollar variation.
- Unemployment rate:
This is a critical point in LatAm countries, especially given the absence of public unemployment insurance (as is the case in Spain). Today, 4% of Mexican are unemployed, less than last year (-0,4 pp. vs. 2015). This is a very low percentage when compared to the Argentinian crisis in 2001, when 1 out of 2 Argentinian households had an unemployed member. Mexican unemployment is also very low if compared to the current Brazilian unemployment rate: 12%.
- Inflation variation rate vs. salary variation:
If prices increase at a higher rate than wages, it is likely to have a direct impact on the mood of consumers. The bigger the gap, the more prone a country is to erosion of its purchase patterns. In the case of Mexico, January 2016 saw the highest minimum wage in last 17 years, with an increase of 9.5% vs. previous year. This is significant when considered in context that inflation rose 3.4% in December 2016 vs. last year, according to the Mexico Central Bank. In contrast, in 2016 Argentinian inflation rose +41% vs. previous year, and the nominal salary variation was only +33%. This represents a -3pp loss in terms of real wages and a -4% volume drop in FMCG basket. If inflation continue to rise in Mexico over the coming months, it should be followed closely. It is likely to drive bigger purchases per trip, promotions will be sought by consumers (particularly in modern trade) and low price brands will benefit. This has already been seen with the recent “Gasolinazo” (price increase in gasoline prices in January 2016), which led 13.2% Mexicans to declare that they will seek cheaper brands during this year.
- Local currency vs US dollar variation:
If average consumer is indebted in foreign currency, a direct negative impact into their savings and consumption power should be expected. More than half of Mexican households are indebted and this percentage has been growing during the past years: +11 pp 2015 vs. previous year. During the last five years, the Mexican peso declined +55% vs. US dollar: from $12.93 in 2012 to $19.99 in 2016. In November 2016 to mid-January 2017, the devaluation of the peso rocketed +20%, up to $22 pesos. Surprisingly, the Mexican peso is now topping the ranking of the most appreciating emerging markets currencies: it has recovered +10,5% from November 2016, up to the actual $19,75. It could be that the Nov-Jan peak was triggered by on expectations and subjective factors following the Trump election.
Source: Kantar World Panel