Mexico's outlook as Trump nears 100-day mark

The risk of increased tension and a deterioration in relations under the Trump government will remain high in Mexico and across Latin America. The policies pursued by the U.S. president in areas such as trade and immigration will have an important bearing, particularly in Mexico, although current developments suggest that Trump is not likely to follow through on some of his more radical campaign pledges, while the renegotiation of NAFTA that he announced after being sworn is likely to lead to adjustments to the agreement rather that its total termination. 

Although policy uncertainty in the U.S. caused consumer and investment sentiment to deteriorate markedly at the beginning of this year, Mexico’s economic activity has shown more resilience than initially expected. In January, the monthly proxy GDP (IGAE) accelerated to a 3.0% expansion, buoyed by solid growth in agriculture and services. In addition, the weakness of the peso, along with the ongoing improvement in global demand, has had a welcome effect on Mexico’s external sector, boosting merchandise exports in the first two months of the year. In other positive news, U.S. trade rhetoric toward Mexico has substantially moderated in the past weeks, alleviating concerns of a potential imposition of trade tariffs by the U.S. government on Mexican exports. Moreover, a record transfer of excess funds from the Central Bank to the government bodes well for strengthening public finances and the government’s fiscal consolidation efforts going forward. 

Against this backdrop, we sat down with Ricardo Aceves, Senior Economist for Latin America, to get his perspective on a variety of topics important to Mexico this year.

FocusEconomics: What strengths and weaknesses do you see for Mexico’s GDP in the domestic and external scope this year and the next?

Ricardo Aceves: The economy has various internal and external strengths. The country’s greatest internal strength is household consumption, which is still solid despite having decelerated slightly in Q4 2016. That said, consumers’ real wages are beginning to feel the impact of inflation. The inflation rate we’re now seeing (5.4% in March – the highest level since July 2009) is the result of the gasoline price hike in January and the secondary effects of the depreciation of the peso on the prices consumers pay for goods and services. In terms of the external environment, exports are experiencing a rebound thanks to the weakness of the peso, higher demand for Mexican goods, and a general improvement in global trade.

However, as we well know, what the trade relationship between Mexico and the United States will look like in the future is highly uncertain. Although the Trump administration’s tone regarding the U.S.’ relationship with Mexico has been more conciliatory in recent months, negotiations with China recently along with the administration’s unpredictable foreign policy, show that Trump should be taken seriously and that serious negotiations are going to take place in order to come up with a trade agreement that favors the U.S.

FE: Could faster inflation in Mexico prompt a more dynamic monetary policy that would affect GDP?

RA: Banxico raised the monetary policy rate by 25 basis points to 6.5% in March with two aims: to anchor inflation expectations and to "dance at the same pace as the Fed." The Central Bank was very clear in its last decision: future movements in the interest rate will be subject to the behavior of inflation as well as the expectations economic agents have of it, as well as the movements in interest rates in its neighbor to the north. It remains to be seen if in the coming months Banxico will actually keep pace with the Fed. However, high anticipation of interest rate hikes last year will prove to provide the Bank with some maneuvering room to disassociate itself from the Fed. The recent increase of 25 basis points instead of 50 as in the previous meeting reflects Banxico’s more complacent opinion regarding the outlook for inflation and current exchange rate dynamics.

FE: Do you think that the U.S. and its commercial policy have ceased to be a risk for the Mexican economy?

RA: U.S. trade policy is no longer a short-term risk to the economy. The exchange rate is the barometer to determine whether or not Mexico’s economy is out of danger in terms of Trump’s rhetoric or his-yet-to-be-defined trade policy with Mexico. That said, the Mexican economy is not completely out of danger as uncertainty remains high regarding the future of U.S.-Mexico relations and this is causing more volatility in the peso.

FE: Do you think Mexico’s commercial diversification process is a viable project?

RA: The process of commercial diversification, more specifically the diversification of markets for Mexican exports, is a viable project, but it will nonetheless take a long time to complete. China has been very interested lately in having a closer trade relationship with Mexico, and neighbors in South America have spoken up about Mexico turning to those markets.

Although Mexico's economy has shown resilience of late, uncertainty is still high in Latin America's second largest economy. Keep checking back with FocusEconomics for the latest news and forecasts for the Mexican economy as well as 126 other countries and 33 key commodities. You can download a sample of one of our FocusEconomics Consensus Forecast reports by clicking on the button below.

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Disclaimer: The views and opinions expressed in this article are those of the authors and do not necessarily reflect the opinion of FocusEconomics S.L.U. Views, forecasts or estimates are as of the date of the publication and are subject to change without notice. This report may provide addresses of, or contain hyperlinks to, other internet websites. FocusEconomics S.L.U. takes no responsibility for the contents of third party internet websites.

Date: April 18, 2017

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