Economics: Soft internal demand complicates recovery prospects

MEXICO - Report 03 May 2021 by Mauricio Gonzalez and Francisco González

As of February, industrial activity continued to contract within the same -3.0 to -3.4% range it has been averaging since the beginning of the fourth quarter. The crucial manufacturing industry declined at a similar pace despite hopes that a resurgent US industrial sector could help lift activity at Mexican factories, with output continuing to fall in some of the weightiest segments, such as the automotive industry and production of machinery and equipment.

As Covid-19 related restrictions began to ease, the retail industry reported for March its first firming of sales YoY in more than a year, but that improvement could largely be traced to a favorable comparison. Domestic consumption remains anemic (Inegi reports that retail sales fell a seasonally adjusted 3.8% YoY in February) even as inflation pressures continue to mount. The most recent CPI reading shows consumer inflation surged 6.05% — gains clearly not being driven by any firming of aggregate demand — and there is nothing in the monetary policy toolkit that could provide any significant response.

The outlook for Mexico’s energy sector also looks increasingly complicated. Although Pemex management issued a revised business plan, it fails to provide any strategic adjustment for rectifying the National Oil Company’s greatly deteriorated financial and operational health, and reaffirms an increasingly limited private sector role. Upstream, government officials and company management are doubling down on an approach of sacrificing efforts to bolster oil and gas output on the altar of refining all crude domestically and achieving some level of self-sufficiency in fuels and other petroleum products.

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