The impact on the pockets of Mexican will last at least until March 2022, since Banxico estimates that inflation will average 6.3% in that period, that is, twice its target.
Inflation has disrespected the Bank of Mexico (Banxico) and now it will cause the pockets of Mexicans to have a bitter Christmas and a rather complicated January, as expectations predict that prices will be at their highest level in 21 years for the first quarter of 2022.
This deterioration will reduce consumption, affect poor people and threaten to halt the already fragile recovery of the economy.
Banxico updated its inflation expectations upwards for the fourth quarter of 2021, placing them at 6.8%, while for the first three months of next year they are at 6.3%. Both forecasts double the central bank’s inflation target.
“Banxico’s forecasts imply a challenging outlook for the Mexican economy due to the economic stagnation, where although we hear that this year we are going to grow 6%, it is still a rebound effect and it is not enough to be a complete recovery,” said Gabriela Siller, director of economic-financial analysis at Banco Base.
The January slope is always tricky because it is a seasonal issue that happens every year regardless of how the economy is doing, said Luis Gonzali, Vice President and Co-Director of Investments at Franklin Templeton.
“In this case, we are in recovery, and yes, definitely on the January slope there will be price adjustments that are lagging behind and in terms of real purchasing power it will be less and there will be an impact on the pocket and purchasing power” added.
Why did Banxico raise the interest rate?
Although the pressures are expected in the first part of 2022, it is ruled out that inflation and the recent rise in the interest rate to 5% determined by Banxico, suppose some effect on this season of El Buen Fin, which began on October 10. of November.
“Monetary policy does not have an immediate impact, but it takes 12 months, so what they are doing (in Banxico) may be impacting in 12 or 18 months once everything is normalizing, and when we talk about a post-pandemic or what the light is already seen at the end of the road with the pandemic, that there are no new waves or that are no longer significant, “Siller said.
The economist stressed that there is currently a negative gap in GDP, that is, it is below its potential and this also pulls inflation down.
“Banxico is not so concerned about inflation, despite the fact that its constitutional mandate, Banxico’s current priority is -from my point of view- not to let the economy sink and for this, they manage a monetary policy in expansionary terrain,” he agreed. Iván Franco, economist, and director of the consulting firm Triplethree International.
Franco considered Deputy Governor Gerardo Esquivel to be fair, who voted to keep the rate at 4.75%, which represents a loose monetary policy because he does not want to affect the economic recovery with a high rate.
How does the January slope affect?
Marisol Huerta, an analyst at Ve por Más (Bx +), said that a good end of the year is expected in consumer confidence since jobs are recovering as well as the arrival of remittances, which this year aims to achieve a historical record.
“What makes us see is that there is a consumer that is strengthened in terms of spending and favorable expectations for the end of the year. We see an optimistic consumer but we expect a consumer aware that a difficult part is coming,” he said.
“A complicated year-end is coming and a very heavy January slope. With this (you have to be) very careful when spending, especially now that the Christmas bonus is coming, and also when you get into debt,” said the Banco Base specialist.
AMLO’s bad economic decisions sink Mexico
The president of Mexico, Andrés Manuel López Obrador (AMLO), came to power with a fixed idea in mind: for decades, governments handed over the national patrimony to private companies and that is why the rich ended up being richer and the poor, poorer.
Based on this conviction, he has made decisions that have cost Mexico economic growth, jobs, capital flight, attractiveness as an investment destination, and billions of dollars in compensation and renegotiations. AMLO has a deep disdain for technology, science, and technique. He prefers the old and what his intuition dictates than the modern (especially if it is proven with analysis).
The most recent blow to the economy, the Chamber of Deputies, is a reform that implies ignoring contracts signed with private companies for the generation of electricity, and privileging the —more expensive and dirtiest— the generation that carried out by the parastatal company Comision Federal de Electricidad.
With these “ blind sticks ”, as defined by Carlos Urzúa, AMLO’s first Secretary of the Treasury —who lasted only half a year in office and resigned frightened by what he saw—, it is possible to establish what are the precepts dictated by his policy economical.
The first is the replacement of private initiative by the State. AMLO distrusts businessmen. For him, private economic success is synonymous with corruption. Be they transnational companies or businessmen with a first and last name, the president sees them as abusive and the State must recover what they looted. He has a handful of spoiled ones, and with the others, he has established a relationship in which he extorts them and demands them to pay more taxes, or threatens to freeze their bank accounts.
In the background there is an effort to return to the obese state that does everything: extracts oil, builds airports, trains, refineries, generates electricity. And he does not need anyone else because, from his point of view, the government does it better than private initiative.
However, the Mexican economy depends largely on private capital – 80% of investment on average, against 20% of the government – and this hostility and change of rules have generated a collapse in investment: 22 consecutive months down in your annual comparison. Before the pandemic, in 2019, the economy contracted 0.1% – the worst year since 2009 due to the bad signals sent from the government.
Another precept of the president is that it is not governed by internationally accepted metrics. He considers that measurements such as the Gross Domestic Product (GDP), poverty, employment and others, do not reflect reality. Asked about the poor numbers that his administration has left, he prefers to disqualify the rating agencies and promote the creation of new indices: instead of calculating GDP growth, estimating the increase in happiness in the population.
Furthermore, its fiscal management is completely neoliberal. Although his performance on all economic fronts explicitly seeks to break with neoliberalism, his handling of the budget says otherwise. He does not want a public deficit and defends that at the cost of generating more poor people. In the midst of the pandemic, Mexico was one of the world’s governments that gave the least financial support to its citizens to alleviate the economic blow: less than 1% of GDP. It was ranked 83rd out of 84 countries, just above Uganda, on an International Monetary Fund list. All for not getting into debt. The consequence: in Mexico, there will be 10 million more people in extreme poverty after the pandemic.
AMLO is torn between love and hate with free trade. Since his presidential campaign, he has supported and decidedly opted for the approval of the Treaty between Mexico, the United States, and Canada (USMCA). Strange for a man who in his speech lashes out at globalization and whines at the economic abuses of the powers. The USMCA allows Mexico to hang on to the US economy to get out of the crisis. The president loves that. What he does not like is that the treaty itself provides protection mechanisms for private investment that can curb its appetite for statism. The T-MEC is for AMLO a useful ally and an annoying counterweight.
The president says that his is a new economic model, but it is rather an old recipe inherited from the Institutional Revolutionary Party half a century ago. He assures that it will bear fruit, that it will end up benefiting the country, especially those who have the least, and that if there are problems it is because the neoliberal resistance is trying to prevent the transformation that he is leading. The first year of the 4T, 2019, was one of calm waters internationally. The second year, that of the pandemic, was one of the troubled waters. Neither of them did well for the ship. His chart did not work for good or bad weather. You will have to do a much better job of not sinking the ship in the 3 years you have left.