Commentary: Dissecting Banco De México Minutes, Mexican IP Numbers

Minutes from last the meeting which lead the Banco de México to cut its overnight target rate a record low of 3.50 percent were released last month on October 25th.  On November 8, September industrial production numbers were also released by the national statistics agency.  With these two highly significant releases, the time has come to examine the prospects for the Mexican economy, and more pertinently, the outlook for the the Mexican Peso. 

Bank Minutes

The Mexican economy slowed sharply in the first quarter of 2013, and registered a quarter on quarter contraction in Q2.  The Bank noted stressed two positive signs which it believes will drive a marked uptick in Q3 GDP.  First, public spending on by the national government should shore up internal demand.  A full reverse stop has been implemented by the government on its ambitious but overdone fiscal consolidation plan it rolled out last January.  The Bank is hopeful that public expenditures on infrastructure projects will help a devastated construction industry. (See Below)  

Secondly, exports to the US have driven a strong recovery in the manufacturing sector which had slumped earlier in the year.  In sum, the manufacturing sector is back on a positive growth trajectory.  

Finally, the bank has noted that subdued economic activity worldwide and well anchored inflation expectations will result in a era of low global inflation.  For Mexico, it expects that core inflation will remain below 3 percent.  Furthermore, the bank expects food and energy prices to ease up, bring the general bring index down to "very close" to the bank's three percent target.  The bank is also committing to watch for potential pass-through effects from Peso depreciation on food and energy prices.  Finally, the bank is not satisfied with meeting its target only on core inflation, and believes that achieving 3 percent general inflation is key to anchoring inflation expectations. 

Industrial Production 

One figure sums up the Mexican IP report.  

  Since the middle of 2012 construction has slowed, and more recently fallen off a cliff.  The entire industry, both public and private, is in a depression, falling a startling 8.3 percent in September on an annual basis.  On the other hand, manufacturing has continued its upward ascent after a brief hiccup at the end of 2012.  Finally, service sector growth has continued to be robust.  In sum, a tremendous slump in a highly important part of the economy, coupled with and in part driven by a decline in government spending, has hobbled Mexican growth.

Outlook for the Mexican Economy and the MXN 

Stable government finances and strong external accounts mean that Mexico continues  to enjoy sizable structural advantages over other emerging markets and some advanced economies.  Furthermore, structural reforms and liberalization of the energy market will help drive private sector investment.  The biggest downside risk for the domestic economy continues to be the development on a two speed economy, with construction slumping and service industries and manufacturing expanding.  On the MXN, the taper fears will abound, but Mexico should be less vulnerable to the kind of capital flight which hit South Africa and Turkey given its exposure to the US, reform minded government, stable financial system, and relatively low public and private debt levels.