In a report last week, Banco de México said the country's 2014
gross domestic product (GDP) would likely rise only 2.0% to 2.8%
compared with 2013. That would still mark an acceleration
from the 1.1% increase last year, but it would be significantly
less than the previous forecast of 2.3% to 3.3%. Private
economists have also been cutting their growth forecasts for
For 2015, the central bank maintained its previous forecast that
GDP would expand 3.2% to 4.2%.
The central bank said consumer price inflation in Mexico would
likely remain around 4.0% in the second half of 2014 but fall
sharply toward its target of 3.0% in early 2015.
Comment: Over the last two
decades, Mexican GDP growth has averaged 2.5% per year. If
growth in 2014 comes in at the mid-point of the central bank's new
forecast, it will roughly match that rate. However, it is not
yet clear that the economy can reach that level of growth.
GDP in the first quarter was up just 1.8% from the same period one
year earlier, and many economists expect that second-quarter GDP
(due out on Thursday) will be up only about 1.5% or even
less. Year-over-year growth in the third and fourth quarters
would therefore have to average about 3.2% for full-year growth to
reach the central bank's new mid-point. There certainly are
some reasons for optimism. For example, Mexican exports have
been accelerating recently, and there are signs that the long
decline in construction activity is starting to reverse.
Nevertheless, Mexican consumers are still discouraged by the
relatively soft labor market and the new sales taxes that took
effect at the beginning of 2014. Consumer spending will
likely continue to be a drag on the economy for the near future, so
only time will tell whether Mexican economic growth can approach
its long-term average this year.
Patrick Fearon, CFA
Vice President, Fund Management