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 Business News | June 2007 
BBVA: Mexico Outlook
 BBVA Bancomer
The Mexican economy has entered a slowdown that will lead it this year to post a growth rate below its potential. Given the cyclical synchronization of the Mexican economy, the downturn is the result of lower external demand in the United States, and its effects can mainly be seen in industry and to a lesser extent, in domestic demand. Employment generation will exceed the average levels of the past few years, with around 600,000 new jobs in the formal sector. In comparing the current situation with the last cyclical slowdown that Mexico faced due to lower U.S. economic growth in 2000, internal demand is displaying greater strength, and this is reflected in the performance of variables such as construction, credit to the private sector, and employment. Furthermore, the causes of the downturn in the U.S. economy are different, and they currently can be attributed to the real estate market, which has less impact on external demand. The outlook for the U.S. economy only involves a tempering of growth and not a recession, and lower growth will be noted in the first part of the year, with a probable upturn toward 2008.
As to inflation, the balance of risks has worsened. The rising trend in inflation can be attributed to the accumulation of different supply shocks. Many of these derive from conditions in the international raw material market: the rise in energy prices, in the costs of construction materials and agricultural products, particularly corn and sugar. The conditions for more moderate growth in inflation toward the end of the year are present, such as the incipient weakening of these supply shocks, reduced economic activity, the strength of the peso, wage revisions in line with the inflation target and, contrary to 2005, anchored expectations of inflation. However, risks persist in the event of new supply shocks or a greater contamination to other prices.
Given this panorama, in April, Mexico’s central bank chose to restrict its monetary policy, qualifying its measures as preventive and subsequently, in May, the central bank decided to put its actions on hold. Without modifying its estimated inflation target, the motivations for such an approach can be found in the uncertainty and weakening of the balance of risks. Although it could be felt that the Banco de México might take advantage of the slowdown in the economy so as to try to strengthen the anchoring of inflation expectations toward 3%, which would lead the central bank to be more restrictive. We believe that it will choose to maintain the same monetary policy with a message indicating greater restriction until inflation clearly converges toward its target. The risks are undoubtedly that in the next few months an isolated rise in interest rates could occur. In any case, at the end of the year or the beginning of 2008, room for a reduction in interest rates is the most probable scenario.
A final note, of great importance, has been the progress in structural reforms, the first of which involves the ISSSTE. In the next few months the following reform will involve fiscal policy, given higher spending in the short term, and subsequently, energy policies, with greater amounts of budgetary resources involved. These are the first steps in an agenda full of issues in which the country cannot wait any longer to raise its competitiveness and to achieve a higher growth potential that would allow for greater job creation. We are confident that the maturity of the forces involved will prevail, with a view toward benefiting the country, and that progress will continue to be seen in this window of opportunity that is viewed on the horizon. |
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