Mexican private consumption likely to remain constrained for some time; might hamper growth

The Mexican peso is one of the worst performing currencies year to date in Latin America and in the broader emerging market space. This is because of the high correlation of the peso with the oil price and the investors’ preference to short the peso as a means of exemplifying a negative view on emerging market as a whole because of low transaction costs and quite cheap cost of carry. But it is also evident that the economic growth has begun showing certain signs of weakening at the edges.

Private sector, which mainly drove the year to date Mexican growth, has started to weaken, although from high levels. Private consumption is likely to remain constrained until the US election’s outcome is clear, said Commerzbank in a research note.

This is expected to weigh on economic growth. Moreover, even if the peso is weaker than before, this is not resulting in improved performance of export because of continued weak growth in the US. While Mexico had strong growth before and low inflation, it now indicates a clear deterioration on the growth side.

“We now think that Mexican GDP growth will be only 2 percent in 2016 and 2.3 percent in 2017,” added Commerzbank.

Given this backdrop, the rate hike profile has also been reduced. Given a slower growth outlook, Bank of Mexico might be in a dilemma if the Mexican peso falls considerably. The central bank’s reaction through additional rate hikes might then further dampen economic growth outlook. Hence the Mexican central bank is likely to raise its benchmark rate just by 25 basis points in December, possibly along with the US Fed.