Mexico’s Economic Forecast Keeps Changing

This week, Banxico adjusted its forecast for Mexico’s GDP as annual inflation slowly decreases from its peak in Abril. The global shortage of containers has elevated trading prices and and complicated imports and exports to Asia. Meanwhile, BBVA commented that Millenials became essential during the pandemic and the economic recovery. Finally, Lisset May Cervantes, Senior Director of Sales at Kueski, discussed the buy now, pay later (BNPL) model and explains why it is popular among new generations. 

Interested in more? Here are the week’s major headlines in Finance!

• BBVA Research said that Millennials are essential to the economy as almost one out of every three active workers during the pandemic belonged to this generation, which allowed them to play a fundamental role in Mexico’s economic reopening. The Generation X population has higher incomes than Millennials with professional degrees (35 percent higher) or graduate studies (48 percent higher). Given the weight Millennials have in the workforce, BBVA recommended incentives in regions that provide low wages so that the talented population does not try to migrate to other areas or countries.

• Banxico adjusted its GDP forecast from 5.8 percent to 6.1 percent year-on-year and expects 2021 to close with a 5 percent inflation rate. This change was due to increases in commodities (which drove other prices) and changes in consumption patterns. Even though Banxico’s forecast changed, Banorte explains that there are expectations that medium-term inflation will revert downward, with long-term inflation unchanged. Similarly, the estimates for the underlying inflation in the medium and long term were unchanged, both at 3.5 percent. According to a survey by Banorte, the factor that has influenced this estimate the most is governance, followed by internal economic conditions, public finances, inflation, public insecurity, domestic political uncertainty, uncertainty about the domestic economic environment and the weakness of the domestic market. 

• Mexico could enter the Top 10 global economies, given how exports are recovering. However, the ocean freight rate in 2H2021 continues at record highs due to high levels of demand, which could cause difficulties for shipping to China. The freight all kinds (FAK) rate for the Asia-US maritime corridor increased again during July, with the ocean-all-in in the Asia-US West Coast corridor being US$19,500–US$25,000 for a 40HQ container, which is equivalent to a 600 percent year-on-year increase. The Asia-US East Coast corridor was at US$25,500–US$30,200 for a 40HQ container, equivalent to an increase of 500 percent compared to July 2020. The shortage should decrease as port congestion reduces when companies are able to resume their normal work rhythms, which were disrupted by the pandemic.

• Mexico’s annual inflation has slowly decreased from its peak in Abril, dissipating from 6.08 percent to 5.81 percent in July. This is the fifth consecutive month that the rate landed outside Banxico’s ideal range. For reference, the bank’s inflation target is 3 percent, plus or minus 1 percentage point. At Banxico’s monetary policy meeting in June, the bank had opted to raise its benchmark interest rate by 25 base points to 4.25 percent in order to avoid adverse effects on inflation expectations, citing price information in the US. Board members were divided on this approach, some calling the inflationary pressures temporary, while the majority were concerned about observable supply chain disruptions. Banxico’s next policy decision should be announced Thursday, August 12, where a Citibanamex survey forecasts the central bank will increase its lending rate by 25 base points. 

• Lisset May Cervantes, Sr. Director of Sales at Kueski and an MBN Startup Contributor, shared why people prefer the buy now and pay later (BNLP) model. Businesses using this model allow consumers to buy an item and pay in interest-free installments later, shaking up the traditional credit card business. BNPL is most popular among Millennials and Generation Z, who prefer to have access to a variety of payment options and have proven to be quick adopters of new technologies. Users are attracted to the feature of receiving their purchases right away while delaying repayment for weeks or months. In many cases, BNPL provides free financing for the consumer. Considering the differences in costs of living and salary cycles in different countries, BNPL services may serve different needs in other economies. While it may be just another payment method in advanced economies, the BNPL model could potentially be a game-changer in developing countries and bring unbanked populations into the mainstream economy.