Economics: New reform, inflation and supply bottlenecks are among growth risks

MEXICO - Report 01 Nov 2021 by Mauricio González and Francisco González

Economic data released in October provided further confirmation that the Mexican economy continues to sustain some momentum even as year-earlier comparisons are no longer as easy as they had been. Private consumption and retail sales continued to expand but have yet to fully rebound to pre-pandemic levels, which is also the case of industrial activity.

The indicators released just this past week also largely confirmed the same trends of recent months in the labor market, as well as the extent to which non petroleum exports remain an economic growth catalyst. But while a significant slowing of growth activity was expected from last week’s preliminary GDP report for 3Q21 due to the loss of an extremely low base of comparison, it fell a full two points short of what the market had anticipated – the latest evidence of how much supply-chain bottlenecks are taking their toll, especially on key manufacturing sectors, with the automotive branch taking a beating. Transportation equipment not only ceased to be a major growth driver but saw output fall 5.0%.

Inflation remains a point of concern, with the 12-month rate accelerating to 6.12% by the middle of October. The trend toward the strong wage growth of the past three years has been easing up considerably in recent months, and we could start to see even more pronounced wage gains should we continue to witness a deterioration of inflation expectations capable of contaminating contract wage negotiations next year, with another major minimum wage hike likely in January. These factors could begin to drive price formation throughout the economy.

Additional inflation pressures are just one point of concern in relation to President López Obrador’s reform bill to roll back many aspects of the country’s 2014 opening of the electric power sector to private competition and bring it back under direct state control. Although that proposal is by no means assured of passage at this point, one of its many potential impacts could be a substantial rise in electricity rates that could have significant implications for most sectors of the economy.

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