Economics: Strong indicators during 1Q23, but with multiple factors that could heighten country risk
Economic activity in Mexico began the year with a stronger-than-expected rebound from late 2022 as January data showed private consumption had risen an annual 5.9% at the same time as Gross Fixed Capital Formation jumped 7.1%. The services sector (6.5%) was a major driver.
But the impressive strength seen from many indicators harbor the seeds of future problems. A larger number of manufacturing branches are scaling back their pace of production as slowing US manufacturing undercuts demand for Mexico’s non-petroleum exports and the "Super Peso" stokes demand for consumer goods imports, depressing demand for those produced domestically, a development that could bring negative implications for GDP growth over the medium term.
There has been a continuing yet gradual deceleration of inflation, but that easing has come strictly in response to a receding non core component. Core prices have remained sticky, thereby pressuring the central bank to raise interest rates and keep them high until inflation more clearly turns the corner.
Considering the strength of many indicators in the first months of 2023, it is worrisome that multiple situations could heighten country risk. These include rising public debt and deficits, liquidity problems at Pemex and losses at the CFE, USMCA disputes, and initiatives to reform laws that regulate government contracts, among other factors that contribute to a hostile environment for private investment. In this week’s Outlook, we analyze the Mexican economy’s performance and the principal international factors influencing it, and review the prospects for the current year and beyond.
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