The Mexican economy continues to expand at a moderate annual rate of growth of 2.4 percent as the economic recovery lost steam during the first half of 2015. Moderate growth during the first semester of 2015 in Mexico has been attributed to weakness in industrial production in the U.S., a further drop in the volume of oil production reducing annual GDP growth by about 0.4 percentage points and financial market volatility. A gradual recovery of economic activity is expected to continue, with economic growth strengthening from 2.3 percent in 2015 to 3.0 percent in 2017. The expansion of economic activity will rely on growth of private consumption and investment, with an increase in manufacturing exports following the significant real exchange rate adjustment and robust growth in the U.S. eventually providing additional support.
Public sector revenue showed a strong performance mainly due to a sharp increase in income taxes, reflecting the deferred impact of the revenue-enhancing tax reform enacted at the end of 2013. Higher income and fuel excise taxes compensated lower public sector oil revenue due to declining oil production and sharply lower oil prices. Anticipating longer-lasting low oil prices, the government is reducing public sector expenditures over a two-year period (2015-2016). Despite higher income and excise tax revenue and in order to maintain fiscal consolidation plans, the government decided to respond to lower oil revenue by reducing public sector spending in 2015 and 2016, by 0.7 percent of GDP in each year. A strong commitment to sound public finances is at the core of the government’s policy response to the challenges posed by an increasingly complicated external environment, despite the possible dampening impact on the pace of economic growth.
A substantial depreciation of the Mexican peso vis-à-vis the U.S. dollar over the past year has raised price and financial stability concerns related to tighter external financial conditions and a possible overshooting of the nominal exchange rate. The policy response to adverse shocks that led to the currency depreciation aims to maintain solid macroeconomic fundamentals and achieve orderly adjustments on financial markets. In this regard, the authorities already engaged in moderate currency market interventions to smooth exchange rate movements and announced plans for fiscal consolidation as well as a monetary policy that will take into account its relative stance vis-à-vis the United States. Pass-through of currency depreciation to domestic prices has thus far been limited as overall consumer price inflation is moving slightly below the medium term target of 3 percent.
A complicated global environment will continue to weigh on Mexico’s economic growth prospects.. The Mexican authorities have already signaled their commitment to appropriate fiscal and monetary policy tightening aimed at maintaining macroeconomic stability.