Economic Activity Slows its Recovery: Banxico

After a strong economic recovery in the beginning of 2021, Mexico has started to struggle in the face of inflation pressures, a slow economic recovery and uncertainty.

The Bank of Mexico (Banxico) highlighted that its board increased the target for the overnight Interbank Interest Rate (IIR) by 25 base points. As monetary policy decisions in August, September and October placed the IIR at 5 percent. Banxico stated that the Board had already increased the expected path for inflation in the September and November meetings, with a palpable uncertainty in the horizon.

“In 3Q2021, economic activity slowed its recovery, exhibiting a contraction compared to the previous quarter and persisting heterogeneous performance among its different sectors. This is due to the recrudescence of the pandemic during the period. To the above was added a sharp drop in business support services activity due to the entry into force of the new regulation on subcontracting labor,” reads Banxico’s report.

Banxico’s board also highlighted that Mexico continues to face unexpected shocks at the national and international level that lasted more than expected, forcing the bank to adjust inflation forecasts. However, Banxico anticipates that inflation will go down in 2022 until it converges to the 3 percent goal by 1Q2023.

During those three months, Mexican non-automotive exports registered a 3.6 percent growth in comparison to the last quarter, while oil exports increased in seasonally adjusted terms. On the other hand, automotive companies showed a -10.8 percent fall in exports with continuous supply chain disruptions of various inputs to blame, especially semiconductors.

Mexico’s external accounts registered a US$4.07 billion deficit, which represented 1.3 percent of the country’s GDP. This result was attributed to a reduction in the non-oil trade balance, which was compensated by high income from travel and the historic levels regarding remittances.

Several indicators showed major improvements on the labor market in comparison to the previous quarter as well, even though some sectors were affected. Banxico’s report stated, “It is estimated that for the overall economy, the average salary increased 5.9 percent compared to the same period in 2020, a lower increase than the estimated 6.8 percent in 2Q2021.”