Natural Calamities, Stalled NAFTA Talks Impact Mexico Economy

Mexico’s economy contracted more than previously thought in the third quarter due to the impact from storms and quakes on the oil and tourism industries, the government said, adding to concerns that stalled NAFTA talks are hurting growth.

Third-quarter gross domestic product shrank by 0.3% compared with the previous quarter, the first contraction in almost two years. The economy grew 1.5% compared with the same period a year earlier, the slowest pace of growth since the fourth quarter of 2013. Mexican stocks were down nearly 0.8% following the data, Reuters reported.

Mexico was struck by devastating earthquakes and hurricanes in August and September that affected the oil industry, denting economic activity. “This deceleration is largely explained by a temporary and limited impact from the natural disasters,” the finance ministry said in a statement on Friday, citing the oil, education and tourism industries.

The ministry added that impact appeared to have dissipated and that it was maintaining its 2017 economic growth forecast of 2% to 2.6%.

However the central bank is less optimistic, trimming its growth forecast for 2017 to between 1.8% and 2.3% this week due to the natural disasters and the impact on investment from worries about the future of the North American Free Trade Agreement. Talks have stalled to renegotiate the pact that underpins $1 trillion in trilateral trade. The central bank sees growth of up to 3% next year.

US President Donald Trump has repeatedly threatened to pull out of NAFTA if the treaty is not reworked to better serve US interests, spooking investors and prompting Mexico to try to diversify its trade.

NAFTA and Mexico’s 2018 presidential election are likely to continue hitting activity as “important investment decisions may be postponed, scaled down or even canceled, particularly in export-oriented sectors,” Goldman Sachs economist Alberto Ramos said on Friday.

Ramos said the uncertain terms under which Mexican exporters will have access to the US market make it harder for companies to put money into Mexico at the moment.

A lack of progress in talks, increasingly stringent demands from the United States and the tight timeline set by negotiators make it increasingly likely that NAFTA will collapse, BMI Research, a unit of Fitch Group, said on Friday in a client note.

Taken by Surprise

The seasonally adjusted third-quarter contraction was deeper than the 0.2% contraction that preliminary data showed last month, and it took investors by surprise.

“The market was not expecting any change from preliminary numbers,” said Continuum Economics, a research firm.

Latin America’s second biggest economy is also battling stubbornly high inflation of more than 6%, crimping the central bank’s room to stimulate activity with lower borrowing costs.

Mexican central bank chief Agustin Carstens told a local radio station on Friday that the peso "is undervalued in general terms" and that it seemed reasonable for the currency to be trading at 17 pesos to 18 pesos per dollar.

The peso has been hurt by concerns that talks to overhaul the NAFTA, a lynchpin of Mexico’s economy, could fail. The peso traded at 18.5225 per dollar on Friday.

Mexico posted a current account deficit of $5.528 billion during the third quarter compared with a surplus of $129 million during the second quarter, the country’s central bank reported.

The third quarter deficit was equivalent to 1.8% of gross domestic product and compared with a current account deficit of $6.174 billion in the third quarter of 2016.

Minimum Wage Hike Fiasco

The chamber of deputies urged the federal government and the national commission of minimum wages (Conasami) to increase the minimum wage to 100 pesos per day as of January 1, 2018.

The chamber called on the agency to immediately convene representatives of trade unions and the employers’ sector to begin working on the increase.

When presenting the proposition before the plenary session, the Party of the Democratic Revolution legislator Arturo Santana recalled that the Conasami agreed last Wednesday an increase to the minimum wage of 10.4% to go from 80.04 to 88.36 pesos per day beginning December 1, 2017.

“To bring the minimum wage to 100 pesos in November 2017 would be a step more inscribed in the new wage culture, a progressive evolution of salaries that, while preserving stability, will induce economic growth and social development,” he said.