The Mexican economy performed better than expected during the first half of 2017, with annual GDP growth at 2.3 per cent. Conditions on financial markets have also improved as the peso appreciated with respect to the US dollar, following a significant depreciation earlier this year. Resilience to shocks, sensible monetary and fiscal policy responses, as well as a gradual improvement in the country’s external environment managed to restore confidence and strengthen economic activity.

A strong recovery of external trade created a vigorous contribution of net exports to GDP growth. Increased external competitiveness derived from the accumulated currency depreciation over the past three years and strengthened US industrial production have been invigorating Mexican exports. Private consumption continues to expand at a steady pace even though increasing inflation is dampening consumers’ purchasing power by limiting real labour income growth. Total investment is flat for the second year in a row, dragged by a fall of public investment.

Annual consumer price inflation peaked in August at 6.7 per cent following the impact of domestic fuel price hikes at the beginning of the year and some pass-through from accumulated currency depreciation. Inflation is expected to come down next year to within one percentage point of the central bank’s medium-term target of three per cent.

The government remains committed to its medium term fiscal consolidation program that should keep the overall deficit in the medium term at 2.5 per cent of GDP and place public debt on a downward path. An improved fiscal stance contributed to a revision of the outlook on Mexico’s sovereign credit rating to stable from negative by two of the main credit rating agencies.

Reconstruction after the devastation caused by two major earthquakes in September 2017 in the central and southern parts of the country will be mainly funded with resources from reserve funds and insurance that make up the government’s natural disaster risk management strategy, as well as some budgetary reallocations.

World Bank

October 2017

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