Economics: February economic data shows growth continues to slow as inflation remains high

MEXICO - Report 06 Mar 2023 by Mauricio Gonzalez and Francisco González

Economic indicators released last month showed continuing growth in key areas of industrial and service activity, as well as evidence that the slower pace that began to emerge over the course of the fourth quarter extended into 2023. They also showed that inflation remains sticky, especially in the case of core prices. All the while, the peso has continued to firm.

Despite official claims to the contrary, the ongoing strengthening of the peso is not a sign of economic strength but of an excess of foreign currency that reflects many factors, including the extent to which the gap separating US and Mexico interest rates has widened, thereby lifting the carry trade. If the “super peso” should remain below 19/USD, it could further restrict GDP growth in 2023 as the country’s main growth driver (non oil exports, especially manufactures) runs up against not only a slowing US economy but also forex-fueled steeper prices for Mexican-made goods. Banco de México’s policy board surprised markets on February 9 by raising its overnight interbank reference rate by half a percentage point to 11.00%, double the increase that had been anticipated.

The fiscal deficit in its broadest definition has risen to 4.4% of GDP at a time of considerable budgetary pressures. This could translate into severe problems for government finances in the medium term, potentially affecting the country’s sovereign debt rating and the government’s borrowing capacity and costs. The government also appears determined to further stoke trade tensions with the US and Canada and potentially harm Mexico’s agricultural production with its February 13 decision to double down on efforts to gradually eliminate the use of glyphosate, ban the planting of GM corn and restrict its use in various productive processes.

Economic news this past week included the trade and unemployment reports. These proved to be better than expected, while cyclical indicators were more mixed.

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