Mexican economy likely to grow slightly below trend until next year

Mexican economy is likely to expand a tad below trend this year and in the next year, assuming that the US economy continues to expand moderately in the medium term. Investment demand is expected to avert a sharp slowdown, given the increase in investment growth in the first quarter and the likelihood of a moderate rise in consumption and exports.

“This leads us to revise up our 2016 and 2017 forecasts by 0.2pp and 0.1pp to 2.6 percent and 2.4 percent respectively,” said Societe Generale in a research report.

However, growth is unexpected to expand more as foreign demand is quite uncertain and growth of domestic consumption is likely to slow in the near term on the possibility of higher inflation. Inflation is likely to accelerate to 3.4 percent because of the sharp and sustained pressure on the Mexican peso.

The near-term pressure on the MXN is expected to compel the Bank of Mexico to modestly hike interest rate in the near term. But, according to Societe Generale, the impact of Brexit on the markets, the US elections and a stronger USD and global uncertainty might result in a dovish stance by the US Fed as it is unlikely to hike rates until the second quarter of 2017.