Economics: Inadequate Response Plan - Signals
The election of Republican Nominee Donald Trump as President of the United States has highlighted the existence of structural vulnerabilities in the Mexican economy that have been exacerbated in recent months.
In this context, it is important to analyze the various variables that have deteriorated before and independently of Trump’s election victory, and which have generated exchange rate pressures and heightened uncertainty about the direction the Mexican economy is headed in, a sense that will be further magnified by the new political situation. These variables include a depressed oil sector, the greatly diminished performance of manufacturing exports, and the drop off in foreign direct investment to levels that are unlikely to suffice for covering the extent to which the country’s current account continues to deteriorate.
It is also possible to identify two factors that could generate a direct negative effect on the part of our northern neighbor: aggressive trade and hostile immigration policies. Should the US president-elect make good on his campaign promises, it would lead to a considerable reduction of Mexico’s exports and remittance inflows.
In this situation, the manner and content of how Mexican authorities communicate the specific response mechanisms they have in place becomes crucial, and so far their reactions have been inadequate.
In a separate development last week, Banco de México decided to raise its benchmark, one-day, interbank interest rate by 50 basis points to 5.25%. The last time it was at this level was July 16, 2009. The central bank is hoping the rate hike will help offset inflation pressures and keep inflation expectations anchored.
The monetary authority explained that one inflation upside risk is that the peso could depreciate further due to the extent that the external outlook has grown more uncertain, a development that could ultimately contaminate inflation expectations and generate second-order effects on prices.
According to the central bank, the world economic outlook has become more complicated as a result of the outcome of the US elections, and the balance of both economic-growth and inflation risks has deteriorated.
In other economic news, Mexico’s unemployment rate as calculated using seasonally adjusted data fell to 3.78% of the economically active population during the third quarter, the lowest level since the second quarter of 2008 (3.68%).
But despite the drop in joblessness, the Rate of Labor Informality totaled 57.3% of the active workforce last quarter, which means that for every three people employed two are working in the informal economy.
In absolute terms 29.8 million people are working in the shadow economy, 1.8% more than in the third quarter of 2015.
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