Economics: Pass-through Effect Looms
Peso depreciation has been a source of considerable concern in virtually all spheres of Mexican society. One of the main reasons for that sense of unease is the extent to which we are seeing a resurgence of inflation pressures.
Just two weeks after Banco de México and the Ministry of Finance announced monetary and fiscal adjustment measures, the peso is trading at 18.1 pesos per dollar in the retail market after having softened as far as 19.2 pesos in mid February, a re-appreciation of 5.6%. Nevertheless, the peso had already weakened 23% over the course of 2015 and the first two months of 2016, which will necessarily have repercussions on the level of inflation, despite official reassurances to the contrary.
The most recent data suggest that inflation in 2016 will break above the Banco de México target. Bi-weekly inflation has been trending higher through the second half of December. One of the issues that we should also keep in mind is that producers in industrial sectors that intensively use imported inputs may have exhausted their capacity to absorb the rise in their input costs, which could force them to begin passing along those costs to the consumers.
In other economic news, one of the most significant economic indicators published last week was a disappointing leading index for January, which fell 0.16 points from December, the most pronounced sequential decline in 16 months. The main factors accounting for the downside in the January index was a 0.29 point drop in the case of the Standard & Poor’s 500, and a 0.03 point slippage from Mexico’s IPC blue chip stock index.
In a similarly negative vein, both public institutions and private analysts lowered their GDP growth outlook. In Banco de México’s monthly survey for late February, private sector economists scaled back their economic growth estimates for the current year and next. The new market consensus, according to the report, calls for the Mexican economy to grow 2.45% in 2016, whereas they had anticipated GDP growth of 2.69% just a month earlier. We at GEA estimate a 2.50% expansion this year. Analysts also lowered their GDP projection for 2017 to 2.98% from 3.18% in late January. These less optimistic forecasts come on top of the downward adjustments analysts had made in to their growth forecasts for 2016 and 2017 in the January survey.
In its quarterly inflation report for the fourth quarter, the Central Bank also lowered its GDP growth interval for the current year and 2017 last week. Banxico announced it had adopted a growth interval of between 2.0% and 3.0% for 2016, as opposed to the 2.5% to 3.5% interval it had previously projected. The monetary authority also estimated the Mexican economy will grow somewhere between 2.5% and 3.5% in 2017, half a percentage point below the interval range it had adopted in its previous quarterly report on inflation of 3.0% to 4.0%.
In the fourth quarter inflation report, Banxico explained its reduced growth intervals for 2016 and 2017 as resulting from an external environment that had proven to be more complicated than it had anticipated in its report for the third quarter.
In essence, the Central Bank estimates less growth in external demand than it had previously anticipated. That adjustment reflected downward adjustments in forecasts of US industrial activity and expectations of a further slowing of global economic activity.
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