Winds of change for Mexico’s twin-engine second-bigger LatAm economy

A  breakdown by component indicates that GDP growth in the second quarter, namely 4.1% compared with the same period a year ago, resulted mostly from the good performance by private consumption and exports, both contributing two percentage points. It has therefore been confirmed that, after the initial leadership by its foreign sector and its gradual replacement by domestic spending, the Mexican economy is at last benefiting from the dual boost of both these engines, domestic and foreign.

In spite of the good rate of activity, the possibility of a greater world economic decline than expected and, particularly, uncertainty regarding the economic and political future of the United States, continue to impose substantial risks on the foreign flank.

Aware of these risks, the Monetary Policy Committee decided to keep the official interest rate unchanged, although it hinted at its greater concern for the recent trend in prices, warning of the possible need to raise interest rates if recent inflationary pressures persist. However, the surprising upswing in inflation over the last few months can be basically attributed to supply shocks related to food prices, whose effect is deemed to be temporary, so we still don’t expect any changes in the official interest rate in the short term.

On the other hand, we do expect advances, and soon, in the legislative area. Getting the most out of his last few months as President of Mexico, Felipe Calderón has put his foot down on the reformist accelerator in order to set up a reform programme that makes the labour market more flexible.

Without doubt, these reforms are particularly important for the second economy in Latin America given the need to provide a definitive boost to its growth potential, one of the lowest in the region.

Furthering the reform programme is one of the main challenges facing Enrique Peña Nieto (from the PRI party) as from 1 December, when he takes over from Calderón (from the PAN party) and, given his limited majority in the Congress, he will need opposition support to make progress on this front. He is therefore interested in supporting the initiative of the incumbent President, not only to set up the modernization of the labour market and therefore give a necessary push to competitiveness, but also to establish a basis of consensus that will allow him to push through the rest of the pending reforms.

Aware of this, he has urged the members of his party in Congress to support the proposal by President Calderón and we will soon know if he managed to convince them, as the decision to approve or reject the reform proposal is imminent.

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