Mexican economy likely to have expanded below trend in Q4 2016

The Mexican economy is expected to have grown below trend in the fourth quarter of 2016, while the outlook is worsening. On an average, the economy has been expanding around or slightly more than 2 percent. This is around 0.5 percentage points lower than its current growth potential. Looking at the December trade numbers and the further growth of industrial production in the month, the Mexican economy is likely to have expanded 2 percent year-on-year and 0.5 percent sequentially in the fourth quarter of 2016, according to a Societe Generale research report. This also signifies that the Mexican economy possibly expanded 2 percent in the whole of 2016.

The rise in oil prices and the sharp weakening of the Mexican peso might contribute further to export competitiveness, stimulating manufacturing and growth. But the worsening of financial conditions might possibly more than counteract gains from peso depreciation. Furthermore, the trade outlook is rapidly deteriorating and would definitely have huge effect on Mexican growth potential, depending on the final shape of the U.S. trade policy adopted by President Trump’s new administration.

With the medium-term trade outlook, it is largely unlikely that investment outlook would rebound for the remainder of this expansion. Furthermore, consumer expectation has worsened while purchasing power would also be impacted on the outlook of higher inflation on the back of a weakening peso, noted Societe Generale.

“Therefore, although stronger fiscal spending in the US could help resurrect Mexican growth to some extent, the medium- to longer-term outlook will deteriorate unless US trade policy uncertainty recedes (and favourably)”, added Societe Generale.