Economics: Trade Structure Poses Risks

MEXICO - Report 11 Feb 2016 by Mauricio Gonzalez and Ernesto Cervera

The conditions prevailing in the international economy in recent months, which have translated into a severe contraction in the international price of oil as well as a drastic depreciation of the Mexican peso in relation to the dollar, have had and will continue to harbor diverse implications for the Mexican economy. The most obvious of these correspond to the external sector, the terms of foreign trade, and public finance.

The most evident changes have come in the petroleum trade balance, as the surplus that ran for many years has given way to increasingly pronounced deficits beginning in the fourth quarter of 2014.

And in the terms of trade, the balance of export and import price indexes have not only failed to improve, but instead have continued to deteriorate significantly (by more than 20%). This comprises a weakening of export prices disproportionally greater than the softening of those of imports.

In this week’s “Economic Outlook” section, we focus on analyzing the external sector effects of a depreciating peso and depressed oil prices in an environment of heightened uncertainty.

In other news, Banco de México decided to leave its reference rate unchanged but in the statement that accompanied the rate announcement it noted that while economic growth in the fourth quarter had proven slightly stronger than that of the preceding quarter, the balance of risks to growth had deteriorated somewhat in relation to the third quarter.

The bank also observed a weakening of the worldwide economy in response to a slowing of both developed and emerging economies, the stalling of global trade and continuing uncertainty as to just how firm the Chinese economy may be going forward.

Given the reasons cited above, as well as the central bank’s insistence that the short and medium term inflation outlook is congruent with its 3.0% full-year target, the policy board decided to leave the reference rate at 3.25%.

In relation to productive activity, Mexico’s leading indicator fell 0.09 points in December compared to the previous month, the sharpest contraction experienced in nine months. Factors that contributed to slippage in the leading index were a 0.28 point drop in the Standard & Poor’s 500 index and a 0.06 point decrease in the Mexican Stock Exchange’s IPC.

Last week the authorities also reported that producer confidence in all three sectors covered by the survey continued to stumble deeper into pessimistic territory in January. Sentiment in the commercial, construction and manufacturing industries weakened 3.1, 2.9, and 1.6 points, respectively.

In contrast, Mexico’s Consumer Confidence Index strengthened in January, and the 1.6% improvement compared to a year earlier was the strongest such shift since July 2015, when the CCI firmed 1.8%. Nevertheless, the January result was far weaker than the 4.4% average increase in consumer optimism seen during the first half of 2015.

Both the producer and consumer confidence reports were marked by diminished expectations of how the economy is likely to perform over the next 12 months.

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