Mexico's stable economic outlook a rare piece of good news

Amid drug violence, Mexico's slow but steady growth - and low inflation rate - is setting it apart from other economies in the region.

By , Correspondent

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    Mexico's Central Bank Governor Agustin Carstens speaks during an interview with Reuters at the Bank of Mexico in Mexico City May 24, 2011. Carstens said his bid to become the first non-European to head the International Monetary Fund has been well-received and he hopes to win support from advanced and developing nations alike.
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Mexico’s economy might not be the fastest-growing or most dynamic in the region, but the macroeconomic landscape here has looked pretty rosy these days - rare good news in a place where drug mayhem monopolizes headlines.

Foreign reserves are up. Trade with the US is booming. But perhaps most important, Mexico has one of the lowest inflation rates in the region - even dropping at record speed at the beginning of this month.

That means that unlike other large economies in Latin America, it is not battling soaring consumer prices.

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Brazil, for example, might get all the attention for its powerhouse growth, but it is grappling with 6.5 percent inflation rates while Mexico's dropped to a five-year low at 3.04 percent in March. Brazil, Chile, and Colombia, among others, are facing appreciating currencies too. Mexico’s peso has strengthened but not nearly as dramatically as the Chilean peso or Brazilian real.

So what has put Mexico in such a cushy position?

Some of it is hard work that has paid off. Bank of Mexico Governor Agustin Carstens has received credit for controlling inflation, which could boost his bid to head the International Monetary Fund.

Some of it has more to do with good fortune. Mexico grows much of its food on its own turf and doesn't have to pay the high price tags caused by global shortages in order to import food from elsewhere. The food it does import from its main trading partner and northerly neighbor is bought on the cheap as Mexico’s currency has strengthened extensively against the US dollar. And Mexico's policy of maintaining generous gasoline subsidies keeps the price of skyrocketing fuel much lower than it really is (some say this is to a fault).

Yet some of the forces keeping inflation in control might be more troubling.

Global warming, for example, might be playing a role. Mexico’s government subsidizes electricity prices during the hottest months in order to help families pay for air conditioning. May has been a doozy of a month, and so the government is said to have dropped electricity prices more than usual as thermometers rose through the roof. Lower electricity prices helped bring down overall prices by a record 0.75 percent in the first two weeks of May.

Another factor could be that salaries have remained largely stagnant - a source of many an angry news headline in the local press. When salaries stay put the price of goods produced by the salaried workers also stay put, curbing inflation. Mexico’s recovery is well underway - with forecasts of up to 5 percent growth this year - but Jose the Plumber doesn’t feel it in his wallet, critics say.

While official central bank figures are said to show a slow rise in wages, the nation’s statistics agency INEGI released a report earlier this month showing average salaries in real terms have actually fallen in the first quarter, the daily newspaper Reforma reported on May 25. And Mexico’s minimum wage has hovered just above 50 pesos (about $4 to $5) a day for years.

“What is gained with such low inflation if salaries are dropping?” asks economist Rolando Cordera at Mexico’s National Autonomous University.

Experts easily explain this phenomenon as a function of an economy that is bouncing back slowly, where growth of jobs and salaries will be felt later on. But in the meantime, is there a valid complaint from the public that, if Mexico boasts a comeback, then where’s their share?

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