Economics: Taking stock and looking ahead

MEXICO - Report 15 Jan 2018 by Mauricio González and Esteban Manteca

We look for the Mexican economy to essentially sustain its 2017 pace of growth in the coming year and by sector for services to remain the main motor force. We project the agricultural sector to step up its pace of growth and manufacturing to serve as the strongest contributor to industrial growth largely on the strength of robust foreign demand for Mexican made vehicles.

But we also expect GDP growth to be powered once again this year by the export sector, principally by high added-value sectors such as machinery and equipment and transport equipment at the same time as all other branches could register more modest increases.

However, it is important to consider that our estimates are subject to certain risks, one of the most important being the degree of uncertainty surrounding Nafta renegotiation as there is a considerable lack of visibility as to whether Nafta talks will lead to the treaty being canceled or renegotiated on terms that are unfavorable to Mexico. Either outcome could have an adverse effect on Mexico’s already moderate pace of economic growth and immediately lead to a downward adjustment in our estimates.

Uncertainty is already expected to further diminish foreign investment but gross capital formation is likely to strengthen considerably more in 2018 than in 2017 thanks largely to public sector as infrastructure spending typically peaks in presidential election years. Private investment, in contrast, can be expected to remain stalled as investors weight and see who will be the next president of Mexico.

After consumer inflation ended 2017 at a 12-year high of 6.77%, we look for a favorable statistical effect to lead to a return to what we would regard as a new “normal” level closer to 4% than the central bank’s 3% target, a renewed stability that would largely come from a statistical effect, but those projections are also exposed to adverse forex risk should the year produce negative surprises on the Nafta or electoral fronts.

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