Low inflation in 2019 is opportunity for Mexico to cut interest rates and heat up consumption

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According to information from El Financiero, Mexico ended 2019 with an annual inflation of 2.83%. It is the second lowest level since 1970, when the country’s National Institute of Statistics and Geography (Inegi) began measuring the indicator.

The result is also below the target set by the country’s central bank, Banxico, at 3%, which brings good news and bad news: while Mexico has a clear opportunity to reduce its base interest rate in the beginning of 2020, the inflation data is also a clear sign that the country’s economy has not advanced the year before.

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In November, Banxico’s forecast was that the country would close 2019 in stagnation stagnant or with a slight economic downturn. The World Bank’s projection for the Mexican economy in the last year, according to data revised and released on Wednesday (8), is 0.0%

Mexican economist Enrique Quintana, who writes for El Financeiro, said last Monday (6) that the Mexican automotive industry, one of the strongest segments of the sector, as in Brazil, will depend heavily on what will happen in the United States throughout 2020.

He explains that, for years, the relevant connection between the two countries has not been between Mexico’s GDP and US GDP, but between Mexican GDP and its neighbor’s industry.

“In November 2019, US industrial output fell 0.7% at the annual rate; In the three months from September to November, the decline averaged was of 1.3%, corresponding to the Mexican stagnation in the period. The hypothesis that there was a decoupling between Mexico’s GDP growth and US industrial production could have been sustained in the early months of the year. By the end of 2019, it is clear that the path of Mexican GDP already follows US industry, “wrote Quintana.

In December, according to data from the Institute for Supply Management (ISM), US manufacturing activity was the weakest in more than a decade (47.2). It is the lowest level of activity since 2009, which analysts say frustrates expectations of accommodation and improvement in the sector following the truce established in the US-China trade war.

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And the forecasts for the US, especially for industry, are not very encouraging. Despite the expectation that a first part of the US-China agreement will come out in the coming weeks, the country will continue to suffer the effects of a global slowdown, in addition to the possible political effects of an election year.

At first, Mexico should continue to focus on reducing interest rates. In December, the country’s central bank cut interest rates for the fourth time in a row. The decision was already expected by the market, because lower rates tend to increase consumption and credit and thus revive the economy. Negotiations following the trade treaty renewal with Canada and the US also need to be closely monitored.

Internally, however, analysts are concerned about the country’s fiscal situation, as the current government has taken somewhat populist measures that could reduce the country’s ability to make investments. This is the case, for example, with the 20% adjustment of the country’s minimum wage by 2020.

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