Mexico: Muted Policy Reaction To Recession

4Q19 GDP data (preliminary) confirmed that the Mexican economy registered a slight recession last year, ending the year at -0.1%, down from 2.1% in 2018. Capital investment, which has dropped sharply since AMLO took office, as seen in the chart below, remains the biggest drag to economic activity. Consumption and net-exports have, meanwhile, become the main drivers for GDP growth (more on this below).

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With the GDP growth carry over into 2020 now standing at 0%, we have entered the new year with a balance of risks for economic activity biased towards the downside. Our new forecast is for a 0.7% GDP expansion this year, which compares with a higher, but also declining, market consensus of 1.0%.

Despite the recession, some inflation concerns remain, as wage pressures rise

Headline inflation ended 2019 slightly below the target, at 2.8% year on year. That is a good result when compared to 2018’s 4.8%, but the improvement is relatively narrow-based, as it reflected the collapse in the more volatile and less predictable components of the CPI, ie, its non-core components. Non-core inflation fell from 8.4% to 0.6% in the same period, driven by food and energy. 

Core inflation has, meanwhile, stayed remarkably steady, if somewhat higher than the 3% target, trending within a narrow 3.5-3.9% range for almost 2 years. These levels are also largely in line with the evolution of inflation expectations, as seen in local market surveys. 

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Lingering concerns over the persistence of core inflation and above-target inflation expectations should remain the primary arguments for central bankers to proceed with caution, as they extend the easing cycle. In fact, these concerns have gained special resonance now that the federal government has opted to implement another large-scale (20%) increase in the minimum wage.

Even though the impact of the minimum wage over broad labor market dynamics is seen as relatively narrow, when compared to Brazil that has a history of widespread labor market indexation to the minimum wage, for instance, the large increase could influence wage negotiations throughout the year. 

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The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument.  more

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