The Mexican economy performed better than expected during the first half of 2017 with annual Gross Domestic Product (GDP) growth at 2.3 percent. Conditions on financial markets have also improved as the peso appreciated with respect to the U.S. dollar, following a significant depreciation earlier this year. Resilience to shocks, sensible monetary and fiscal policy responses, as well as a gradual improvement in the country’s external environment managed to restore confidence and strengthen economic activity.
A strong recovery of external trade created a vigorous contribution of net exports to GDP growth. Increased external competitiveness derived from the accumulated currency depreciation over the past three years and strengthened U.S. industrial production have been invigorating Mexican exports. Private consumption continues to expand at a steady pace even though increasing inflation is dampening consumers’ purchasing power by limiting real labor income growth. Total investment is flat for the second year in a row, dragged by a fall of public investment.
Annual consumer price inflation peaked in August at 6.7 percent following the impact of domestic fuel price hikes at the beginning of the year and some pass-through from accumulated currency depreciation. In response, the Central Bank hiked its monetary policy rate by 125 basis points during the first half of 2017 leaving the overnight interest rate at 7.0 percent by the end of June. Inflation is expected to come down next year to the upper side of the interval of plus minus 1 percent around the Central Bank’s medium-term target of 3 percent.
The government remains committed to its medium term fiscal consolidation program that should keep the overall deficit in the medium term at 2.5 percent of GDP and place public debt on a downward path. An improved fiscal stance contributed to a revision of the outlook on Mexico’s sovereign credit rating to stable from negative by two of the main credit rating agencies. Reconstruction after the devastation caused by two major earthquakes in September 2017 in the central and southern parts of the country will be mainly funded with resources from reserve funds and insurance that make up the government’s natural disaster risk management strategy as well as some budgetary reallocations.
A contentious and prolonged renegotiation of North American Free Trade Agreement (NAFTA) that could delay negotiations beyond early 2018 would increase uncertainty about the future of the trade agreement. This could complicate the process due to the proximity of the presidential elections in Mexico (July 2018) and U.S. mid-terms (November 2018). It would also raise the risk of terminating the agreement with a disruptive impact on trade, investment and financial relations.
Last updated: October 10, 2017