MexECON Blog

Central Bank Cuts 2014 Growth Forecast

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 2014.

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

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