The Mexican economy continued to expand at a moderate annual rate of growth of 2.5 percent during 2015. Private consumption became the main driving force of economic activity on the back of stronger job creation, real wage growth, and credit expansion. In contrast, the expansion of investment activity has slowed down, including due to public spending adjustments.
A challenging external environment including lower oil prices, a gradual tightening of monetary policy in the United States, and a slowdown of growth perspectives in emerging market economies (including China), contributed to a significant depreciation of the Mexican peso. The peso lost nearly 30 percent against the US dollar, but the pass-through effect to domestic prices has not yet manifested itself as annual inflation has been moving slightly below the Central Bank’s target of 3 percent. In close coordination, fiscal and monetary policy authorities recently announced additional public expenditure reductions for 2016, an increase in the monetary policy rate and a change from pre-announced, rules-based to discrete currency market interventions.
Despite a decline in oil revenue by about 2 percent of GDP, the public sector managed to hit its fiscal deficit targets for 2015 as planned. Public Sector Borrowing Requirements, totaled 4.1 percent of GDP down from 4.6 percent in 2014. The decline in oil revenue due to a slump in oil prices and a decline in the volume of production was compensated by a significant hike in income tax revenue as a result of a deferred impact of the revenue-enhancing tax reform enacted end-2013, an increase of the excise tax on domestic sales of gasoline and diesel, and significant non-recurrent revenue from the annually contracted oil price hedge.
Economic growth is projected to slow down slightly in 2016 as the monetary and fiscal policy response to adverse external shocks will weigh down on aggregate demand. Sustained macroeconomic, price and financial stability as well as continued investor confidence will contribute to a rebalancing of the sources of growth with increasing (net) exports and private sector investments complementing the steady expansion of private consumption. Further progress in the implementation of structural reforms in the financial, telecommunications and energy sector is expected to strengthen the basis for a more vigorous expansion of economic activity over the medium term.
The Mexican government remains committed to fiscal consolidation, reducing the fiscal deficit gradually to 2.5 percent of GDP by 2018.
The Mexican economy faces a complex external environment in which a weak expansion of industrial activity in the United States, persistently low oil prices and heightened risk aversion and financial market volatility pose challenges to the economic policy and growth outlook. The policy priorities in this regard are clearly focused on maintaining prudent monetary, financial, and fiscal policies to create the conditions for stronger growth in the medium term, which should also be supported by the structural reforms under implementation.