Research Dept. News
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Monthly Report, num 345 - April 2011
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International review - Mexico
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Mexico: a balanced cocktail
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Mexico manages to consolidate its recovery without awaking the phantom of inflation.
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While many other countries, emerging and advanced, are battling against growing inflationary tensions and trying not to put at risk, as a consequence, the continuity of their recovery, the Mexican economy is advancing at cruising speed with a historically low rate of inflation (3.6% in February). This delicious Mexican cocktail, which has managed to combine a surprisingly vigorous recovery with a price scenario free from inflationary risk, is worthy of admiration. Even more so if we take into account the fact that the Mexican basket of purchases is highly sensitive to trends in food prices and that these have been rising for several months now.
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The United States' economic improvement and a renewed push from domestic expenditure improve the outlook for growth in 2011.
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We need to look back in time to work out the recipe for such a delicious mixture. To start with, we must remember that Mexico started the crisis with relative macroeconomic stability, achieved at the cost of comparatively restrained economic growth which attempted to avoid, above all, the exaggerated fluctuations of other eras. This stability allowed it to resort, this time, to using countercyclical economic policies to alleviate the impact of the recessionary cycle. However, it could not stop the worst recession in years from damaging the Mexican middle classes. This frightened domestic expenditure to a great extent, needing long months and the support of stimuli to recover, very gradually, the tone it had lost and confidence in its economy.
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The persistent weakness of domestic expenditure and the drastic fall in GDP in 2009 set Mexico apart from other nearby countries, such as Brazil, where the recession was brief and domestic demand hardly affected but which, now, given the too-late withdrawal of stimuli, are facing growing risks of overheating.
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Mexico is also characterized by its huge dependency on US foreign demand, and the recovery on the other side of the Río Grande is advancing at a moderate pace, so the pull by exports in Mexico was neither sudden nor exaggerated. Lastly, we should also remember that Mexico is a net exporter of crude so that, in principle, it is benefited by the high prices internationally.
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All this has not only contributed to Mexico's success in 2010 but paints a relatively comfortable macroeconomic picture for 2011. Moreover, the recent improvement in the United States' economic prospects and the strength of the latest leading indicators for activity in Mexico have led us to slightly upgrade our forecasts for Mexican GDP growth in 2011, to 4.2%. For the moment, however, we have not revised the scenario for interest rates, seeing as, given the apparent calm of prices, we still do not think Banxico will make a move until early in 2012. Nonetheless, if food prices soar and the recovery in domestic expenditure picks up, we might consider the likelihood of an initial rise in the reference rate in the last quarter of 2011.
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