Economics: A sputtering economy and a complex public finance outlook as the monetary policy spread narrows
Data released in October shows the economy continues to spiral downward under the weight of declining productive investment and private consumption. The same weakness is reflected in the labor market, with declining numbers of formal sector jobs being somewhat offset by more people finding informal work.
The outlook for public finances remains mixed, with the government potentially on track to meet its revenue growth targets for the year. But although public spending has remained low so far, major pressures loom in the fourth quarter, raising the threat of a larger-than-planned fiscal deficit.
On the external front, six months of trade surpluses have now given way to two months of major deficits. However, the September and year-to-date results show growth in exports, indicating that US trade policy has not had a significant impact, with the exception of automotive, agricultural, and steel sector sales and, to a lesser extent, aluminum and aluminum products. But that could change once the effect of advance purchases abroad made in response to trade threats fully dissipates.
The administration’s effort to lure the sort of private sector investment the country’s energy sector desperately needs is not promising as the decrees announced on October 3 regulations fail to address several longstanding matters. These include legal uncertainty in the event of disputes over the fulfillment of contracts between public and private companies, as well as the CFE´s dominance of the electricity sector.
In last week’s economic indicators, preliminary GDP fell slightly in 3Q25 as industrial activity accelerated its fall. Looking ahead, this week’s Banxico policy review follows a decision a month earlier to cut its benchmark interest rate a quarter point to 7.50%. Now that the Fed has thrown caution to the wind, the spread between Fed funds and Banxico’s rate could end up narrowing from roughly 600 basis points in 2022-2024 to 350 bp by year’s end, potentially discouraging financial investment in the country.
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