Economics: Inflation Likely to Head Lower
Since the middle of 2016 we have witnessed a rebound in inflation in response to a series of “shocks”, and while we expect a point of inflection to be registered in the near future, at this point it is more important to determine when and at what pace such an ebbing of price pressures might occur, as well as the risks that might delay or serve as an obstacle to this process.
We at GEA expect inflation to embark on a downtrend in the second half of the year. In the context of relative exchange rate stability, there is a low probability that aggregate demand pressures will emerge from the private sector as recent months have produced a moderation of private consumption growth at the same time as there has been a relative stalling of investment. Moreover, we are also witnessing a reduction in commodity prices that will serve to contain food prices.
However, among latent inflation risks we must consider the prospects of a further deterioration of public finance that could re-emerge as a source of pressure on aggregate demand and a possible rebound in the exchange rate once Nafta renegotiation talks get underway.
In this week’s Economic Outlook we analyze the implications of the recent rise in inflation and the specific price context we anticipate for the remainder of 2017 and 2018.
In other news last week, industrial activity fell a real 0.3% in April, the sector’s fifth consecutive decline in as many months. The manufacturing industry recorded strong growth (5.1% year on year), but its contribution to overall industrial activity in April was more than offset by the negative performance of the mining (-9.5%), construction (-2.6%) and utilities (-1.2%) sectors.
Manufacturing’s strong showing was led by a 12.5% expansion of transportation equipment output, by far the best performing manufacturing component for some time. In recent months, transportation-related industries have been the main drivers of manufacturing activity, a development that dovetails with the country’s record levels of automotive vehicle exports. The Mexican Association of the Automotive Industry (AMIA) reported that Mexico exported 228,810 light vehicles in April 2017, a 16.1% increase above levels of a year earlier. Between January and April the industry set a new record by shipping 978,972 units abroad, which also marked an improvement of 14.6% compared to the same four-month period of 2016.
The mining sector was led lower by an 8.4% contraction in the extraction of oil, while construction activity was undercut mainly by a 7.9% plunge in civil engineering works.
Other relevant information released last week included a 1.3% drop year on year in Gross Fixed Investment (GFI) in March as a 4.6% increase in expenditures on machinery and equipment was offset by a 4.8% decline in construction investment.
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