Mexican economic growth recovers modestly; domestic private consumption key driver

Based on Mexico’s monthly indicator of economic activity, there is modest recovery in the country’s growth environment. The Mexican economy is likely to average at an annualized growth rate of 2.6 percent in 2016-2017, said Scotiabank in a research report. The economy continues to be mainly driven by domestic private consumption as seen in the retail sales reports, continuous strong remittances from the U.S., enhanced access to domestic sources of credit finance and falling unemployment.

Nevertheless, the Mexican industrial activity continues to be quite subdued. However, there are signs that the construction sector is improving. The severe drop in crude oil production has curbed the economic growth and constrained credit rating factor determining Mexico’s macroeconomic outlook.

Meanwhile, stabilization in price continues to be a core support for the country’s macroeconomic context, according to Scotiabank. In the past 12 months, the annualized consumer price inflation in Mexico reached 2.6 percent. The Bank of Mexico continues to project that the headline inflation would be close to the permanent target rate of 3 percent through the end of next year.

However, the central bank continues to be touchy regarding potential inflation risk factors linked with disruptive currency adjustments coming from external shocks. In the coming months, the central bank is likely to hike its reference rate in expectation of the US Fed’s policy shifts, combined with intervention in foreign exchange markets, noted Scotiabank.

The policy makers and global market participants have become quite worried about the gradual decline in Mexico’s public finances. The Mexican government has carried out successive reductions to the public sector budget as a response to oil-induced shocks and continuous decline in crude oil production by Pemex. The government executed cuts in public sector budget in order to restore fiscal discipline.

“We estimate that public sector borrowing requirements will decline to 3 percent of GDP by the end of 2017”, added Scotiabank.