Preliminary figures revealed that GDP declined yet again on annual basis in the final quarter of 2019—leading to the first full-year ec...

Mexico Economics February 2020

Preliminary figures revealed that GDP declined yet again on annual basis in the final quarter of 2019—leading to the first full-year economic slump since the 2009 crisis. Industrial-sector output contracted for the fifth quarter running, primarily due to the hammered construction and mining sectors, dragging down overall activity. Moreover, agricultural production cooled in the quarter and although activity in the services sector quickened, the increase was underwhelming, which alludes to softer-than-expected growth in household spending. Turning to 2020, available data suggests a gradually improving scenario. The manufacturing PMI rose in January, albeit remained in contractionary territory. Meanwhile, the services PMI returned to growth for the first time in nine months, which, coupled with strengthening consumer confidence, bodes well for consumption gaining traction.

The economy is expected to recover this year on the back of stronger consumer spending, buttressed by rising real wages and upbeat remittances. Increased effectiveness in executing public spending and investment should also support growth. Depressed business confidence, an uncertain global trade environment and the finances of debt-laden Pemex weigh on the outlook, however. FocusEconomics panelists estimate growth of 0.9% in 2020, which is down 0.1 percentage points from last month’s forecast, and 1.7% in 2021.

Inflation climbed to 3.2% in January (December 2019: 2.8%), thus landing slightly above the midpoint of Banxico’s target range of 2.0%–4.0%. Core inflation, meanwhile, has proved sticky, hovering at 3.5%–4.0% for nearly two years now. Inflation is expected to remain broadly steady going forward, though the sizeable minimum wage hike is an upside risk. FocusEconomics panelists see inflation ending 2020 at 3.4% and 2021 at 3.5%.

At its first meeting of the year on 13 February, Banxico axed the target rate by 25 basis points to 7.00%, coming in line with market expectations and marking the fifth consecutive cut. The decision was unanimous, and was motivated by contained headline inflation and increased economic slack. The vast majority of our panelists see Banxico further loosening policy this year. FocusEconomics analysts expect the target rate to end 2020 at 6.34% and 2021 at 6.04%.

The peso strengthened against the U.S. dollar and hit over one-year highs in recent weeks, buoyed in large part by the signing of the USMCA trade deal by President Trump. On 14 February, the MXN traded at 18.54 per USD, appreciating 1.3% month-on-month. The peso is expected to weaken somewhat ahead, while remaining vulnerable to episodes of volatility and risk aversion. Our panel projects the MXN to end 2020 at 19.65 per USD and 2021 at 19.95 per USD.

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