Supply chains add to Mexico economy slump, piling pressure on central bank

FILE PHOTO: An employee of Estafeta Mexicana holds a box as he works at the company's logistics centre in Mexico City
FILE PHOTO: An employee of Estafeta Mexicana holds a box as he works at the company's logistics centre in Mexico City, Mexico, April 8, 2019. Picture taken April 8, 2019. REUTERS/Edgard Garrido/File Photo

November 25, 2021

(Reuters) – Mexico’s economy contracted 0.4 percent in the third quarter, receding faster than previously thought as services slumped and supply chain issues bit, challenging the central bank as it juggles record inflation, a weak peso and leadership changes.

The number released on Thursday by official statistics agency INEGI was an adjustment from previously published preliminary data that showed a smaller 0.2% contraction in the quarter.

A Reuters poll forecast the final data would show activity shrinking 0.3%.

Global supply chain disruptions have weighed heavily on a recovery in manufacturing, notably in carmaking https://www.reuters.com/business/autos-transportation/mexicos-auto-heartland-workers-struggle-chip-shortage-bites-2021-11-24, while service sector activity slowed during the summer from a resurgence in the coronavirus.

“Going forward, supply-chain frictions, cost-push pressures, lingering policy uncertainty, and weak business confidence are likely to weigh on the broad industrial sector,” Goldman Sachs’ Alberto Ramos said in a research note.

Secondary activity, which includes factories, rose 0.3%, less than the 0.7% print in preliminary data. Tertiary activity, which includes services and transport, contracted nearly 1%, the INEGI data showed https://www.inegi.org.mx/app/saladeprensa/noticia.html?id=6949.

However, Ramos predicted a recovery in coming quarters.

President Andres Manuel Lopez Obrador, asked about the negative data, said Mexico would still hit the government’s 6% growth target this year.

He highlighted the 4.5% year-on-year growth number INEGI reported on Thursday for the quarter.

BANK WOES

The deeper dent to growth could quieten calls for the Banco de Mexico, the country’s central bank, to move more quickly to control inflation with a bigger interest rate increase at its next policy meeting in December.

Mexico’s central bank has a single mandate, to fight inflation, but often mentions economic growth in its policy meeting notes. The bank is also grappling with uncertainty about its next governor after Lopez Obrador ditched his first pick and chose instead a lesser-known economist https://www.reuters.com/markets/currencies/leadership-shake-up-test-mexican-central-bank-inflation-soars-2021-11-24.

Lopez Obrador on Thursday defended the proposal, calling Victoria Rodriguez, a deputy finance minister, an honest and responsible professional who meets requirements for the post.

Banxico has slowly but steadily tightened rates in recent months in a so-far unsuccessful fight against the pace of price rises, which hit a 20-year record in the first half of November.

Mexico’s peso is another consideration for the bank and on Wednesday was at its weakest against the dollar since February.

(Reporting by Miguel Angel Gutierrez, Ricardo Figueroa and Marion Giraldo; Writing by Frank Jack Daniel; Editing by Kirsten Donovan and Diane Craft)