Economics: Activity indicators proved encouraging in August, but risks remain in inflation and public finance stability
Economic data published in August was nominally positive almost across the board, although the month also brought reminders of many continuing points of risk and how much the month’s positive numbers reflected the very depressed state of an economy that was largely in lockdown a year prior.
Just this past week Inegi reported that Mexico’s Gross Domestic Product grew 19.6% during the second quarter of 2021, the economy’s first year-over-year expansion, following eight straight quarters of negative results. With increasing numbers of industrial and service sector branches beginning to achieve relatively robust growth, all three broad sectors of the economy have climbed into positive terrain.
Other robust readings included a seasonally adjusted 47.2% yoy rise in gross fixed capital formation for May and a 13.6% expansion of the industrial sector for June that extended to all four industrial components. But even though the Mexican economy has gradually shown increased momentum as vaccination campaigns move forward and mobility restrictions have been relaxed, the industrial sector's current level remains below the average prevailing prior to the pandemic.
Sources of potential risk abound. Although 10.5 million more people were employed between April and June, the increase was achieved by a massive shift into informal employment (accounting for roughly 80% of new jobs) as millions make their way back into the labor market. Such factors help explain why there has been a reduction in average current household income.
The public finance outlook for the current year and 2022 looks very complicated due to the government’s dependence on non recurring income to cover budgetary gaps, an inefficient spending structure that fails to attend to the public’s basic needs, and rising financing requirements. In addition, both twelve-month headline and core inflation continue to be stubbornly high, with inflation projections for this year and next remaining elevated, expectations that will continue to pressure Banxico to effect further rate hikes until both anticipation and reference rates reach a point of inflection.
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