Economics: Slowing Trend Likely to Continue
Data released last week on aggregate supply and demand through the first quarter of 2017 showed a 4.2% annual increase that was both better than expected and the most pronounced rise of the previous five quarters. In keeping with the trends of previous quarters, private consumption was the component that made the most significant contribution to GDP growth (2 percentage points), followed by the trade balance, which added another half percentage point. In contrast, gross fixed capital formation acted as a drag on economic growth by falling 2.3% between January and March, with negative variations extending not only through its public component but to the private one as well.
It is important to consider that we are seeing a change of direction in the same factors that had been driving growth in private consumption (such as the erstwhile downtrend in inflation, expansion of the wage mass, and considerable increase in consumer credit), and non petroleum exports (exchange rate depreciation). The slackened momentum, or outright loss of those drivers suggests growth will continue to slow over the course of 2017.
This week’s Economic Outlook provides an analysis of how the various aggregate demand components are evolving as well as their medium term outlook.
In a related development, Banco de México (Banxico) said in its most recent monetary policy statement that the economy produced indications of a slowing near the end of the first quarter of 2017 and in the first weeks of the second.
The monetary authority says that while external demand has sustained a positive trajectory, private consumption has slowed in comparison to late 2016. At the same time, weakness in investment has been accentuated, in part, by uncertainty regarding the future of bilateral relations with the United States.
In the same report, the bank announced that its board of governors had voted to raise its same-day interbank lending rate (TIIE) by 25 basis points to 7.00%, the highest the TIIE has been since March 2009. The rate increase was widely expected.
The tightening was designed to further anchor inflation expectations and strengthen the contribution of monetary policy to the effort to bring inflation back in line with the authority’s target (3% +/- 1pp).
This past week the Consumer Price Index registered a 6.30% rate of inflation during the first half of June, the highest level for that two-week period since 2001, when 12-month inflation was running at 6.68%.
The central bank now expects inflation to peak in the coming months and then embark on a downward trajectory. In light of these developments and the current posture of monetary policy, the central bank concluded that the balance of inflation risks is now neutral.
At week’s end Banco de México head Augustin Carstens said that he feels measures are in place to bring inflation back in line with the 3% target and suggested that a pause in the tightening cycle is possible, even in the event that the Federal Reserve were to opt for another rate hike before the end of the year.
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