The Mexican economy expanded at a modest pace of 2% annually during the first half of 2018, below its potential growth, as uncertainties around North American Free Trade Agreement (NAFTA) renegotiations and the Presidential elections weighed on investment. Private consumption continued to be the main driver of growth on the demand side, including on the back of real wage growth turning positive in the first half of 2018. Oil production, which had declined to 1.9 million barrels per day (bpd) by end-2017, from 2.6 million bpd five years earlier, had shown no sign of a trend reversal by mid-2018, as large investments in extraction are progressing slowly.
Consumer price inflation moderated in early 2018, from the 16-year peak of 6.8% reached in December 2017. However, the pass-through from currency depreciation and increases in energy prices stalled convergence towards the 3% target rate, prompting the Central Bank to hike its policy interest rate in June by a further 25 basis points to a 10-year high of 7.75%.
With the elections behind, and the trilateral US-Mexico-Canada Agreement (USMCA) on trade, past uncertainty factors should fade, helping to support a further, albeit moderate, rebound in investment. A resumption of the downward trend in consumer price inflation is expected to support growth in real incomes, thereby bolstering consumption and reducing monetary poverty.
Weakness in the currency and asset markets in advance of the July Presidential election had been more than reversed by early August, with the incoming administration’s economic team signaling its commitment to prudent fiscal and monetary policies implying continued adherence to the Fiscal Responsibility framework as well as the principle of Central Bank independence.
Last Updated: Oct 04, 2018