Bank of Mexico cuts growth forecasts after Trump victory

“We are dealing with a deep shock,” says central bank governor

The Trump effect continues to send tremors through the Mexican economy. The incoming president’s threats to renegotiate trade ties with its southern neighbor has prompted the Bank of Mexico to tweak downward its 2017 growth forecast. It has cut its economic growth outlook for next year to between 1.5% and 2.5% against a previous forecast 2.0% to 3.0%, and says it sees 2018 growth of between 2.2% and 3.2%.

Bank of Mexico Governor Agustín Carstens at Wednesday's press conference.
Bank of Mexico Governor Agustín Carstens at Wednesday's press conference.AFP
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El Banco de México anuncia una caída del crecimiento por el ‘efecto Trump’

“Right now, this is a world that is rich in uncertainty,” Bank of Mexico Governor Agustin Carstens said at a news conference in Mexico City, adding that he thought the current volatility in markets was a temporary phenomenon. “The problem isn’t mitigating volatility, but dealing with a deep shock,” he added.

Carstens said the risks to his country’s trade relationship with the United States underlined the need for Mexico to diversify its exports, and the bank said its current economic projections were based on the current commercial relationship being unchanged.

However, in its quarterly inflation report, the bank warned upcoming growth projections could be revised if US policy toward Mexico changes. Mexican exports and foreign direct investment in the country could also potentially be affected by any US shifts, it added.

The bank warned growth projections could be revised if US policy toward Mexico changes

Mexico’s peso was sent to a record low following the surprise election of Donald Trump in the US presidential election on November 8.

During his campaign, Trump threatened to rip up the North American Free Trade Agreement, block tax remittances, slap tariffs on US firms that try and cut costs by operating in Mexico, and build a wall along the US border with Mexico.

The US and Mexican economies are deeply enmeshed: 80% of Mexico’s exports go to the United States, while 40% of imports come from its northern neighbor, giving it a $100 billion trade surplus, and propping up an economy that is suffering the consequences of low oil prices and weak levels of domestic consumption that can't make up the shortfall.

Trump’s win has caught Mexico on the back foot: it has already raised interest rates this year from 3% to 5.25%.

“The US election result increases the risk of policies to block foreign trade and investment in our country,” warns the central bank.

Mexico’s peso was sent to a record low following the surprise election of Donald Trump 

“It is important to recognize that it is still difficult to identify the elements that will define the economic position of the United States in its bilateral relations with our nation from 2017,” says the bank.

The Bank of Mexico says it is confident that it can make an ordered adjustment, a view not shared by all observers, some of whom say that the impact of Trump’s win will be devastating.

“If Trump keeps his campaign promises, growth will be further affected and we will probably see a recession. But that would be the least of it. The most worrying thing would be that Mexico’s growth model, based mainly on exporting goods to the United States, would be affected, meaning a reduction in its potential growth rate,” says BBVA-Bancomer, the country’s leading bank, in its analysis of how Trump’s win will impact on the Mexican economy.

The specter of recession looms over Mexico. Nevertheless, both the central bank and BBVA-Bancomer believe that sanity will prevail and that the impact will be absorbed without the need for excessive sacrifice. Inflation could spike and reach 4%, and the currency could remain at its current levels of around 20 pesos to the dollar, but for the moment, while readying for the worst, the financial and economic authorities in Mexico seem to be taking a relatively optimistic long-term outlook.

English version by Nick Lyne.


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