Economics: Making Sense of the Trump Phenomenon
One of the factors injecting the greatest sense of uncertainty into the decisions of economic agents in Mexico (producers, investors and consumers) is the election campaign that is currently taking place in the United States. The threats being made by Donald Trump, the Republican nominee, against Mexico have already generated all manner of response, ranging from speculative moves against the peso to investors deciding to postpone investment decisions at home and abroad while awaiting the emergence of a lower risk environment once we get past the outcome of the US election. This context has combined with unfortunate internal factors on the level of fiscal policy and business confidence that have contributed to sentiment that is substantially more pessimistic than what we observed just a couple of months ago.
In light of the risk of a deterioration of the Mexican economy as a result of a possible (albeit still remote) Republican triumph in the election, which would immediately be reflected in a number of financial variables (exchange rate, interest rates, foreign investment, etc.) and which would also have an impact on aggregate supply and demand variables (production, employment, consumption, investment and exports), in this week’s Outlook section we analyze economic factors within the United States that we should take into account in order to size up the possibility of a Republican victory in November.
In other economic news, last week the authorities released disappointing data on the direction of the industrial sector. During the month of June the industrial sector grew at a scant 12-month rate of 0.3% on a seasonally adjusted basis. While the construction industry (which grew at a 12-month rate of 3.1% on a seasonally adjusted basis) and electric utilities (7.3% yoy) showed favorable results, those positive numbers were almost entirely offset by the ongoing contraction of output in extractive industries (-5.7%). At the same time, manufacturing output grew at a considerably restrained pace over the course of the month (a rise of only 0.8% yoy).
In a related development, Banco de Mexico announced following its regularly scheduled monetary policy review that the risk balance to growth for the Mexican economy had deteriorated since the previous interest rate and policy review statement. The stalling of the industrial sector dating back to the third quarter continues at the same time as further economic weakness has emerged in the form of a slowing of the tertiary sector during the second quarter of the current year, the central bank pointed out. The monetary authority added that private consumption has decelerated along with manufacturing exports and investment indicators performing poorly over the past month.
The central bank statement also noted that a decision was made to leave the interbank same-day lending rate unchanged at 4.25 percent.
Consumer prices increased 0.26% from levels of the immediately preceding month in July, a faster sequential pace than the 0.15% rate recorded for the same month of 2015. The most significant sources of price pressures emanated in July from energy and fees and prices authorized or effectively regulated by the government.
The rise in the energy segment reflected the decision by the Ministry of Finance to authorize increases in the prices of the two grades of gasoline sold in Mexico: premium and regular or “Magna” prices were raised by 34 and 24 centavos per liter, respectively. As a result, premium gas now sells for 14.37 per liter and regular for 13.40 pesos, prices that signify sequential increases of 2.25% for high octane and 1.57% for low octane.
Although the rate of 12-month inflation (2.65%) remains below Banco de Mexico’s target of 3.0%, core inflation has been trending higher, a development that could push the headline rate higher in the coming months.
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