Deterioration of Mexico’s trade balance likely to moderate

Deterioration of Mexico’s trade balance is likely to moderate given the slowing economy. In 2016, trade balance of Mexico has continued to deteriorate following a considerable fall in 2015 due to lower oil exports. However, the rate of deteriorated eased slightly in the first half as imports dropped further. Mercantile exports continued to fall at a significant rate in 2016 due to sluggish demand for manufacturing products from the U.S.

But there was a sudden minor fall in imports recently due to decelerating economic growth. Admittedly, imports shrank 9.9 percent year-on-year in July, the weakest since 2009. This trend is expected to continue in the near term, indicating a trade balance of a deficit of USD 2,257 million in July on  the back of -9 percent and -8 percent growth in imports and exports respectively, noted Societe Generale in a research report.

“We expect the year-to-date trade balance through August to have deteriorated to -USD11.2bn vs -USD9.4bn during the same period last year”, added Societe Generale.

Lower manufacturing exports indicate towards a subdued demand from the U.S., which is likely to continue to determine the trade and manufacturing growth of Mexico. If the U.S. economic growth rebounds, it might help improve manufacturing production and exports even if lower oil exports keep trade balances low, according to Societe Generale.

Declining oil prices have hit the country’s external account and public finances. Therefore, the current account balance has fallen by between 0.5 percent and 0.8 percent of the GDP on a structural basis. If the domestic demand falls more rapidly that the U.S. economy, the trade and current account balances might improve cyclically. But the shape of trade and economic policies in the U.S. after the November election might have considerable implications structurally for Mexico’s trade partner, noted Societe Generale.