God S Englishman Oliver Cromwell and The English Revolution

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Country Report
Mexico
Generated on September 21st 2018

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ISSN 2047-5349
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Mexico 1
Mexico
Summary
2 Briefing sheet
Outlook for 2018-22

4 Political stability
5 Election watch
5 International relations
6 Policy trends
7 Fiscal policy
7 Monetary policy
7 International assumptions
8 Economic growth
8 Inflation
9 Exchange rates
9 External sector
9 Forecast summary
10 Quarterly forecasts
Data and charts

11 Annual data and forecast
12 Quarterly data
12 Monthly data
14 Annual trends charts
15 Quarterly trends charts
16 Monthly trends charts
17 Comparative economic indicators
Summary
17 Basic data
19 Political structure
Recent analysis
Politics
21 Forecast updates
21 Analysis
Economy
27 Forecast updates
29 Analysis
Country Report September 2018 www.eiu.com © Economist Intelligence Unit Limited 2018

Mexico 2
Briefing sheet
Editor: Robert Wood
Forecast Closing Date: September 10, 2018
Political and economic outlook

Andrés Manuel López Obrador of the leftist Movimiento Regeneración Nacional (Morena) won
a convincing victory at the presidential election on July 1st. He will take office on December
1st, after a lengthy transition period.
Morena also performed well in congressional elections, winning a majority in both houses of
Congress. However, the party will lack a two-thirds majority in both houses, which will curb a
potential shift towards more radical policies.
Questions over the strength of the business environment under a López Obrador government
will weigh on GDP growth. A forecast of average annual growth of 2.1% in 2018-22 assumes
that the North American Free-Trade Agreement (NAFTA) stays in place.
Fiscal consolidation is less likely under a López Obrador administration, and The Economist
Intelligence Unit therefore projects an average deficit of 2.6% of GDP in 2018-22. This will lift
the debt stock to 57.9% of GDP by 2022.
Year-end consumer price inflation will return to the 2-4% target band over the next twelve
months, but currency weakening will sustain pressures and keep monetary policy fairly tight in
the early years of the forecast period. Inflation will average 4% per year in 2018-22.
The peso has strengthened significantly following the election, and we expect relative stability
over the remainder of 2018. Nevertheless, peso trends will remain vulnerable to sentiment
around NAFTA negotiations and global trade.
After narrowing in 2017, the current-account deficit will widen to a peak of 2.3% of GDP in 2020,
reflecting lower import demand in the US that year. It will shrink thereafter and remain
manageable, financed by foreign direct investment and portfolio inflows.
Key indicators
2017a 2018b 2019b 2020b 2021b 2022b
Real GDP growth (%) 2.0 2.2 2.0 1.8 2.2 2.3
Consumer price inflation (av; %) 6.0 4.9 4.4 3.7 3.6 3.5
Government balance (% of GDP) -1.1 -2.3 -2.4 -3.1 -2.7 -2.4
Current-account balance (% of GDP) -1.7 -1.6 -1.6 -2.3 -1.7 -1.7
Money market rate (av; %) 7.1 7.7 6.3 6.0 5.5 5.5
Unemployment rate (%) 3.4 3.5 3.5 4.2 3.9 3.9
Exchange rate Ps:US$ (av) 18.93 19.02 19.24 19.58 19.54 19.30
a Actual. b Economist Intelligence Unit forecasts.

Mexico 3
Key changes since July 27th

On August 27th US and Mexican trade officials announced a preliminary deal regarding the
renegotiation of NAFTA. The deal offers some concessions to US demands but retains the
spirt of the original agreement.
Revision to the rules of origin for the auto industry, requiring 75% of all content to originate
from North America (below the initial US demand of 85%, but above the current level of 62.5%),
will affect Mexico's automotive industry slightly.
The deal still needs to be approved by the US Congress, but the preliminary agreement reduces
risks of disruption to US-Mexican trade. This strengthens the probability of only limited
adverse effects from the NAFTA renegotiation process (our baseline forecast).
We have revised down US growth in 2019 to 2.2% (2.5% previously), but the impact on Mexico
is likely to be more than offset by the NAFTA deal, which will bolster confidence earlier than
expected. We now expect Mexico's GDP to grow by 2% (1.9% previously).
We are revising up Mexico's GDP growth in 2020 to 1.8% from 1.6% previously, as we now
expect the US slowdown to be shallower than previously in that year (1.3% compared with 0.8%
previously forecast).
The centreright Partido Verde Ecologista de México (PVEM) has broken ranks with its long
time ally, the ruling Partido Revolucionario Institucional (PRI), putting the government close to
a two-thirds majority in Congress, needed for constitutional reforms.
The month ahead

EndSeptember—NAFTA talks with Canada: While the US and Mexico reached a preliminary
deal at end-August, talks between the US and Canada are ongoing and face some hurdles.
Failure to reach a deal with Canada (with a deadline set for end-September) would hurt trilateral
trade ties, with some negative fall-out for Mexico too.
September 20th—Private consumption Q2: Data are likely to slow a softer pace of sequential
growth compared with the first quarter, when private consumption grew by 1.5% quarter on
quarter.
Major risks to our forecast

Scenarios, Q2 2018 Probability Impact Intensity
Drug-related violence continues to increase at an alarming rate Very high High 20
Very
Talks to renegotiate NAFTA collapse High 20
high
Very
US withdraws from NAFTA High 20
high
Andrés Manuel López Obrador wins a parliamentary majority, leading to
High High 16
significant inter-party friction within congress
López Obrador presidency takes a hard turn to the left High High 16
Note: Scenarios and scores are taken from our Risk Briefing product. Risk scenarios are potential
developments that might substantially change the business operating environment over the coming two
years. Risk intensity is a product of probability and impact, on a 25-point scale.

Mexico 4
Source: The Economist Intelligence Unit.
Outlook for 2018-22

Political stability
Andrés Manuel López Obrador of the leftist Movimiento Regeneración Nacional (Morena) will
take office on December 1st with a strong mandate. He won the presidential election on July 1st
by a substantial margin, and his coalition, including Morena and number of smaller parties, won
majorities in both the Chamber of Deputies (the lower house) and the Senate (the upper house.
This is the first time since 1997 that a single movement has enjoyed majorities in both houses.
During the lengthy transition to a new government, Mr López Obrador's team will work with the
administration of the outgoing president, Enrique Peña Nieto of the Partido Revolucionario
Institucional (PRI). An initial meeting between the two figures in August went relatively smoothly
(notwithstanding prickly issues, including over the new Mexico city airport project, which the
president-elect has criticised sharply despite the project being more than half-way completed; he
has announced a public consultation on October 28th to decide the airport's fate). Moreover, the
US and Mexican governments, with the backing of Mr López Obrador's team, in late August
announced a preliminary agreement on the renegotiation of the North American Free-Trade
Agreement (NAFTA), pending further negotiations with Canada and approval by respective
Congresses.
During the campaign, Mr López Obrador, who came to office amid growing voter disillusionment
with traditional politics and its failure to address entrenched problems of crime, corruption and
poverty, presented a moderate policy manifesto to assuage voters' and investors' concerns about
a potential radical policy shift to the left. He promised to maintain fiscal discipline and not increase
the public debt (albeit while increasing social spending), and unveiled a proposed cabinet
comprised mostly of academics and technocrats, with the exception of the energy and electricity
portfolios, where the picks reflect Mr López Obrador's more nationalist inclinations. But despite
his shift to the political centre ground during the election campaign, Mr López Obrador's large
mandate and past populist stance is fuelling worries among some sectors of the population and
the private sector. He lacks the two-thirds majorities needed in Congress to overturn some of the
structural reforms implemented by the Peña Nieto administration, but will probably slow their
implementation where they do not align with his own policies. Notably, siding with the country's
powerful teachers' unions, Mr López Obrador is likely to walk back education reforms, which
seemed set to improve Mexico's poor educational outcomes over the long term.
Mr López Obrador's room for manoeuvre in areas requiring constitutional reform will depend on
developments in party politics, and on his ability to garner support from politicians from the
discredited traditional parties such as the PRI. In September the centre-right Partido Verde
Ecologista de México (PVEM) broke from its longtime ally, the PRI, and said that it would offer
support to the incoming government; five deputies switched allegiances and actually joined
Morena. This gives Morena a simple majority in the Chamber of Deputies. With their coalition
members (the Partido del Trabajo and the Partido Encuentro Social) the new government will have
313 seats (out of 500)—closer to the twothirds majority needed to overturn other important fiscal,
telecommunications and energy reforms undertaken by the current government. This would also
require the support of a majority of Mexico's 32 state-level legislatures (comprising the country's
31 states and the capital, Mexico City). Nevertheless, his mandate could provide Mr López
Obrador with a convincing bully pulpit from which to pressure opposition members, and he could
resort to referendums or other popular consultations to rally popular support for his agenda.
Mr López Obrador will struggle to address voters' high expectations for change, given the
intractable nature of the country's problems. Even with the president-elect's strong mandate,
governability will be complicated by tepid economic growth, widespread poverty and income
inequality, and fiscal constraints due to still-weak oil income

Mexico 5
Election watch
The next elections will be congressional, provincial and municipal elections and are not due until
2021. The outcome of these will largely depend on the success of Mr López Obrador's first three
years in office, and whether traditional parties such as the PRI and the centreright Partido Acción
Nacional (PAN)—which both suffered heavy losses on July 1st—are able to rehabilitate their
image among voters, or if anti-incumbency sentiment leads to further breakdown of the traditional
party structure. Notwithstanding Mr López Obrador's landslide victory and absolute majorities in
both houses of Congress, he will face some resistance from powerful governors in a number of
states run by the PRI or PAN. Each party holds 12 out of a total 31 states, including Mexico City.
International relations
Relations with the US, Mexico’s dominant trade and investment partner, and home to more than
33m people of Mexican descent, will remain Mexico’s overriding foreignpolicy priority. Tension
will persist, owing to the determination of the US president, Donal Trump, to build a border wall
and tighten restrictions on immigration. On August 27th US and Mexican trade officials
announced a preliminary agreement on the renegotiation of NAFTA, reducing uncertainty about a
possible collapse. The proposed deal offers some concessions to US demands (including stricter
rules of origin in the automotive industry) while retaining the spirit of the original agreement.
Notwithstanding the preliminary NAFTA deal (which requires congressional approval in the US)
and initial favourable overtures to each other from the US and Mexican presidents, the nationalist
impulses of both Mr López Obrador and Mr Trump will sustain the risk of sporadic spats over
sensitive issues.
Given his ideological ties, Mr López Obrador is likely to reach out more to leftleaning countries in
the region. This will slow—but not altogether reverse—efforts by Mexico in recent years to
diversify its commercial ties. Mr López Obrador will maintain ties with the Pacific Alliance,
comprising Chile, Peru, Colombia and Mexico, and with Mercosur, the Southern Cone customs
union. In March Mexico, along with ten other countries, signed the Comprehensive and
Progressive Agreement for Trans-Pacific Partnership, a follow-up agreement to the Trans-Pacific
Partnership, from which the US withdrew last year. Mexico ratified the deal in April, becoming the
first country to do so.

Mexico 6
Policy trends
The endAugust breakthrough in NAFTA talks with the US notwithstanding, Mr Peña Nieto is
effectively a lameduck president. When he takes office in December Mr López Obrador will give
priority to social programmes, streamlining government and fighting corruption. Despite his
populist, left-wing rhetoric, he is unlikely to jeopardise Mexico's hard-won reputation for macro-
economic stability, and we believe that he will not alter economic policy-making dramatic-ally.
He has announced a relatively moderate policy platform and proposed a mostly technocratic
cabinet, other than for top energyrelated posts, reflecting Mr López Obrador's more nationalist
approach towards the sector. However, should the economy slow more than expected, the risk
would rise that he will pursue more expansionary fiscal policies.
Energy policy is of greatest concern, as Mr López Obrador wants to review contracts awarded
under completed oil auctions for signs of corruption and suspend future tenders in the meantime.
However, it is extremely unlikely that Mr López Obrador will revise existing contracts, and he
stands to benefit from the additional income from any increased production to help to finance his
social programmes. His policies also include an ambitious plan to boost crude output by Pemex,
the state oil company, from 1.8m b/d currently to 2.5m b/d by 2021 (above our current forecasts),
as well as building a US$8bn refinery (refinery cost overruns are notorious). The underlying thrust
seems to strengthen Mexico's self-sufficiency in oil. In this and other areas we do not expect a
reversal of reforms, on the assumption that Mr López Obrador will not be able to push
controversial legislation through the national and state legislatures with the required two-thirds
majority. However, there is a risk that he could utilise referendums or other consultations of the
popular will to galvanise public support for his programme. It is more likely, however, that he will
use his presidential powers and those of regulatory agencies to slow the pace of reforms.
Longer-term challenges for policymakers include corruption, poor education outcomes, low levels
of banking penetration, weak competition in some domestic sectors and high levels of informal
employment. Recent reforms to address some of these problems will be slow to bear fruit, given
institutional weaknesses, and Mr López Obrador's policy proposals to address these issues have
been nebulous. Until fully addressed, such challenges will hamper productivity growth and
sustain income inequality.

Mexico 7
Fiscal policy
The public finances will remain under strain, despite a partial recovery in oil prices from their 2016
lows. We forecast that the fiscal deficit will be 2.3% of GDP in 2018, up fairly substantially from
1.1% of GDP in 2017. The low 2017 deficit was underpinned by revenue-raising reforms, which
helped to offset low revenue from the state oil company, Pemex (the oil sector generates around a
quarter of fiscal receipts). However, one-off revenue in the form of the transfer of part of a large
operating surplus by the Banco de México (Banxico, the central bank), equivalent to 1.5% of GDP,
also helped to support revenue. The deficit will widen in 2018 owing to election-year spending
and because Banxico will no longer transfer any operating surpluses to the Treasury.
Notwithstanding the president-elect's apparent commitment to fiscal discipline (which he has
under-scored by emphasising his own personal frugality and announcing cuts to the wages of
highearning government staff), fiscal consolidation is less likely under a López Obrador
administration, and we therefore project an average deficit of 2.6% of GDP in 2018-22. Indeed,
particularly if the economy weakens beyond expectations, there is a risk that Mr López Obrador
would loosen spending more than we envisage, widening the fiscal deficit and lifting the debt
stock.
The debt stock has increased sharply during the Peña Nieto administration's term. This partly
results from a weaker peso, which has raised the local currency value of external debt. The use of
part of the Banxico transfer for debt repayment in 2017 provided some relief, as did some renewed
peso appreciation last year. The public debt stock is forecast to rise from 47.2% of GDP at end-
2017 to 58% of GDP by 2022. Mexico should have little trouble meeting its financing requirement,
given its firm creditworthiness, although any signs of weaker policymaking under Mr López
Obrador would lift the country risk premium, and financing costs will rise regardless, as the
Federal Reserve (Fed, the US central bank) continues its tightening cycle in 2018-20. This could
trigger renewed capital outflows from emerging markets, including Mexico. The IMF renewed an
US$88bn flexible credit line in November 2017 for two years, but we do not expect Mexico to tap
this.
Monetary policy
Banxico will continue to focus on curbing peso volatility and bringing inflation back into the 2-4%
target range. In the latter stages of a lengthy tightening cycle that began in 2016, Banxico last
raised its policy rate by 25 basis points in June, to 7.75%—its highest rate since late 2008—to
curb high inflation and currency depreciation pressures. We forecast that the central bank will
now pause its rate-rising cycle. Given the tightness of current monetary policy (real rates are
forecast at 3% this year), we expect Banxico to initiate an easing cycle in 2019, in order to stimulate
growth—assuming that inflation subsides as expected in 2018.
International assumptions
2017 2018 2019 2020 2021 2022
Economic growth (%)
US GDP 2.3 2.8 2.2 1.3 1.7 1.9
OECD GDP 2.4 2.4 2.1 1.5 1.9 1.9
World GDP 3.0 3.0 2.8 2.4 2.7 2.8
World trade 5.3 4.0 3.7 3.0 3.9 3.7
Inflation indicators (% unless otherwise indicated)
US CPI 2.1 2.5 2.4 1.6 1.8 1.9
OECD CPI 2.1 2.3 2.3 1.9 2.0 2.0
Manufactures (measured in US$) 2.0 7.6 3.4 2.2 3.8 3.2
Oil (Brent; US$/b) 54.4 73.5 72.5 70.0 74.8 77.3
Non-oil commodities (measured in US$) 7.6 4.6 1.3 1.7 -1.1 1.5
Financial variables
US$ 3-month commercial paper rate (av; %) 1.1 2.0 2.7 2.6 1.7 2.0
Exchange rate: ¥:US$ (av) 112.1 108.6 106.8 104.1 100.0 98.3
Exchange rate: US$:€ (av) 1.13 1.18 1.19 1.21 1.21 1.24

Mexico 8
Economic growth
The preliminary deal with the US on NAFTA renegotiation at end-August reduces (whilst not
altogether eliminating) uncertainty, but lingering concerns over economic policy under the López
Obrador administration will dampen business and consumer confidence, leading investors to
delay outlays. However, firm US demand will support export growth, and reconstruction after
earthquakes that struck in September 2017 will boost activity. Real GDP grew firmly in the first
quarter, by 1.1% on a quarter-on-quarter basis, driven by the services sector, and this should
support growth of 2.2% in full-year 2018. From 2019 we expect growth to slow, dampened by weak
private-sector investment amid a weaker business environment, especially as the new
administration comes up to speed with governance. (Much of the bureaucratic staff working in
government is replaced after each election, as Mexico broadly lacks an institutional bureaucracy.)
We expect growth of 2% in 2019, and for a forecast slowdown in the US in 2020 to dampen
Mexico's GDP growth further that year, to 1.8%. We expect growth to pick up thereafter, but our
medium-term fore-casts assume that structural reforms implemented in recent years will not
achieve their full potential, owing to institutional deficiencies (education reform is also likely to be
walked back under Mr López Obrador). Weak public investment and high levels of poverty will
also impede faster growth. On this basis, even in 2021-22 growth is likely to reach only 2.3% on
average. Should the US withdraw from NAFTA, growth would be slower, although a recession
would be avoided.
On the supply side, export-oriented manufacturing is threatened by possible protectionist
measures from the US, but its longer-term prospects remain good, given low wages, a relatively
skilled workforce and deep integration into US value chains. Even if NAFTA were to collapse,
Mexico would retain these advantages. The energy sector will be boosted by reforms and
successful tenders for exploration by private firms. Lower electricity prices and greater inter-
connection with the North American energy grid will help to reduce input costs for businesses.
Tourism will perform well, but other services sectors will be sluggish, owing to weak competition
and regulation.
Economic growth
% 2017a 2018b 2019b 2020b 2021b 2022b
GDP 2.0 2.2 2.0 1.8 2.2 2.3
Private consumption 3.0 2.7 2.3 2.0 2.2 2.3
Government consumption 0.1 1.0 0.9 2.1 1.9 2.4
Gross fixed investment -1.5 1.5 1.0 0.5 2.6 3.0
Exports of goods & services 3.8 6.6 4.2 3.9 3.8 3.4
Imports of goods & services 6.5 3.2 3.8 3.6 3.9 3.9
Domestic demand 1.7 2.3 1.8 1.7 2.2 2.5
Agriculture 3.4 3.5 3.9 3.5 3.8 3.5
Industry -0.6 0.6 1.2 0.9 2.0 2.5
Services 3.0 2.8 2.3 2.1 2.2 2.1
a Actual. b Economist Intelligence Unit forecasts.
Inflation
Annual consumer price inflation edged upwards to 4.9% in August, exceeding the 2-4% official
target range for the 19th consecutive month, owing to higher energy prices and currency
weakening in the month tied to concerns around the election and uncertainty over NAFTA. We
expect inflation to re-enter the target range soon. Restrained increases in nominal wages and
ample spare capacity will prevent domestic demand growth from exerting substantial pressure on
prices. We expect average annual inflation of 4% in 2018-22.

Mexico 9
Exchange rates
Currency volatility is likely to persist for some time, amid less favourable emerging-market
conditions. The peso weakened sharply between mid-April and early June amid an emerging-
market sell-off and concerns over trade with the US. The currency has regained ground since the
election, trading at Ps18.5:US$1 on August 10th, before weakening again through to early
September to Ps19.5:US$1 amid lingering concerns about the impact of US trade policies (with
talks with Canada's inclusion in a renegotiated NAFTA still unclear). As interest-rate rises by the
Fed continue, there is a risk of further volatility, although our forecasts assume steady but
relatively gradual depreciation. Should Mr López Obrador unexpectedly pursue expansionary
policies, the peso would be vulnerable to further weakening. We expect Banxico to use dollar
purchases and currency hedging when necessary to curb volatility.
External sector
We forecast a current-account deficit of 1.6% of GDP in 2018. The servi-ces and primary income
deficits will be slightly larger, but trends in the trade account will partly offset this. The current-
account deficit will peak at 2.3% of GDP in 2020, owing to the US slowdown, which will reduce
demand for Mexican goods and services and trigger lower remittances inflows. Better US
conditions will allow the deficit to narrow to an average of 1.7% of GDP in 2021-22.
The opening up of the telecoms and energy sectors will partly offset delays or suspension of
foreign direct investment (FDI) in manufacturing owing to concerns about NAFTA and US
pressure on businesses to rein in outsourcing. The current-account deficit will be covered by FDI
and portfolio investment. Mexico has an extensive cushion of foreign reserves, which will provide
over four months of import cover in 2018-22.
Forecast summary
Forecast summary
(% unless otherwise indicated)
2017a 2018b 2019b 2020b 2021b 2022b
Real GDP growth 2.0 2.2 2.0 1.8 2.2 2.3
Industrial production growth -0.5 0.6 1.2 0.9 2.0 2.5
Gross fixed investment growth -1.5 1.5 1.0 0.5 2.6 3.0
Unemployment rate (av) 3.4 3.5 3.5 4.2 3.9 3.9
Consumer price inflation (av)c 6.0 4.9 4.4 3.7 3.6 3.5
Consumer price inflation (end-period)c 6.8 4.7 3.7 3.6 3.5 3.5
Lending interest rate 7.3 7.9 6.5 6.2 5.7 5.7
Budgetary public-sector balance (% of GDP) -1.1 -2.3 -2.4 -3.1 -2.7 -2.4
Exports of goods fob (US$ bn) 409.8 447.2 466.0 481.0 476.7 499.0
Imports of goods fob (US$ bn) 420.8 454.5 476.0 495.5 485.1 510.1
Current-account balance (US$ bn) -19.5 -19.1 -21.0 -30.2 -23.7 -26.0
Current-account balance (% of GDP) -1.7 -1.6 -1.6 -2.3 -1.7 -1.7
External debt (end-period; US$ bn) 446.1d 475.2 501.0 527.5 551.8 585.2
Exchange rate Ps:US$ (av) 18.93 19.02 19.24 19.58 19.54 19.30
Exchange rate Ps:US$ (end-period) 19.79 19.21 19.35 19.76 19.19 19.40
Exchange rate Ps:€ (av) 21.37 22.74 22.94 23.70 23.69 23.88
Exchange rate Ps:€ (endperiod) 23.73 22.76 23.22 23.91 23.51 24.25
a Actual. b Economist Intelligence Unit forecasts. c Seasonally adjusted. d Economist Intelligence Unit
estimates.

Mexico 10
Quarterly forecasts
Quarterly forecasts
2017 2018 2019
1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr
GDP
% change, quarter on quarter 0.3 0.5 -0.1 0.8 1.0 -0.2 0.9 0.6 0.5 0.4 0.4 0.4
% change, year on year 3.0 3.0 1.7 1.6 2.3 1.6 2.6 2.4 1.9 2.5 1.9 1.8
Private consumption
% change, quarter on quarter 0.5 1.0 0.6 0.4 1.5 -0.1 0.8 0.7 0.5 0.5 0.5 0.5
Government consumption
% change, quarter on quarter -0.6 0.2 -0.4 0.7 1.1 -0.6 0.3 0.3 0.2 0.2 0.2 0.2
% change, year on year 1.3 0.3 -1.0 -0.2 1.5 0.7 1.5 1.1 0.2 1.0 0.9 0.8
Gross fixed investment
% change, quarter on quarter -2.1 -0.1 0.1 0.0 3.2 -2.1 0.6 0.6 0.1 0.1 0.0 0.1
% change, year on year -2.2 -0.9 -0.7 -2.1 3.2 1.1 1.7 2.3 -0.8 1.3 0.8 0.2
Exports of goods & services
% change, quarter on quarter 2.9 -2.2 -2.1 4.1 2.5 1.0 2.5 2.2 0.4 1.0 -0.4 0.1
% change, year on year 8.1 5.4 -0.3 2.5 2.2 5.6 10.6 8.5 6.2 6.2 3.1 1.1
Imports of goods & services
% change, quarter on quarter 3.0 0.6 0.8 2.8 3.1 -2.8 0.2 0.2 1.4 1.4 1.3 1.3
% change, year on year 7.7 7.7 5.3 7.4 7.6 3.9 3.3 0.7 -1.0 3.2 4.4 5.6
Domestic demand
% change, quarter on quarter -0.1 0.8 0.3 0.3 1.9 -0.7 0.6 0.7 0.3 0.4 0.3 0.4
Consumer prices
% change, quarter on quarter 2.1 1.7 1.4 1.3 0.9 1.0 1.8 1.2 0.9 1.0 0.9 0.9
Producer prices
% change, quarter on quarter 3.6 -0.8 -0.2 3.0 1.6 2.5 1.3 0.9 1.4 1.2 0.9 1.0
Exchange rate Ps:US$
Average 20.39 18.58 17.82 18.92 18.77 19.38 18.94 19.00 19.15 19.21 19.27 19.32
End-period 18.81 17.90 18.13 19.79 18.33 20.06 18.97 19.21 19.18 19.24 19.30 19.35
Interest rate (%; av)
Money market rate 6.4 7.0 7.4 7.4 7.8 7.9 7.7 7.4 6.7 6.3 6.2 5.9
Long-term bond yield 6.8 7.1 7.2 7.3 7.8 7.9 7.8 7.8 7.7 7.4 7.1 7.2

Mexico 11
Data and charts

Annual data and forecast
2013a 2014a 2015a 2016a 2017a 2018b 2019b
GDP
Nominal GDP (US$ bn) 1,274.8 1,314.9 1,171.3 1,076.6 1,151.8 1,224.5 1,280.4
Nominal GDP (Ps bn) 16,282 17,479 18,563 20,093 21,800 23,292 24,631
Real GDP growth (%) 1.4 2.8 3.3 2.9 2.0 2.2 2.0
Expenditure on GDP (% real change)
Private consumption 1.8 2.1 2.7 3.8 3.0 2.7 2.3
Government consumption 0.5 2.6 1.9 2.3 0.1 1.0 0.9
Gross fixed investment -3.4 3.1 5.0 1.1 -1.5 1.5 1.0
Exports of goods & services 1.4 7.0 8.4 3.5 3.8 6.6 4.2
Imports of goods & services 2.1 5.9 5.9 2.9 6.5 3.2 3.8
Origin of GDP (% real change)
Agriculture 2.3 3.8 2.1 3.5 3.4 3.5 3.9
Industry -0.2 2.6 1.2 0.4 -0.6 0.6 1.2
Services 2.2 2.7 4.3 3.9 3.0 2.8 2.3
Population and income
Population (m) 122.5 124.2 125.9 127.5 129.2c 130.8 132.3
GDP per head (US$ at PPP) 16,853 17,489 17,264 17,764 18,286c 18,787 19,315
Recorded unemployment (av; %) 4.9 4.8 4.4 3.9 3.4 3.5 3.5
Fiscal indicators (% of GDP)
Public-sector revenue 23.3 22.8 23.0 24.1 22.7 24.0 24.5
Public-sector expenditure 25.7 25.9 26.4 26.6 23.8 26.3 26.9
Public-sector balance -2.3 -3.1 -3.4 -2.5 -1.1 -2.3 -2.4
Net public debt 37.9 41.3 45.4 49.4 47.2 48.5 51.5
Prices and financial indicators
Exchange rate Ps:US$ (end-period) 13.08 14.72 17.21 20.73 19.79 19.21 19.35
Consumer prices (end-period; %)d 4.0 4.1 2.2 3.4 6.8 4.7 3.7
Producer prices (av; %)d 1.1 1.9 0.4 5.4 7.7 6.5 5.0
Stock of money M1 (% change) 10.3 14.5 16.4 15.5 10.2 5.3 5.7
Stock of money M2 (% change) 10.7 8.2 6.5 13.3 9.4 8.8 10.9
Money market interest rate (av; %) 4.3 3.5 3.3 4.5 7.1 7.7 6.3
Current account (US$ m)
Trade balance -909 -2,790 -14,597 -13,065 -10,990 -7,296 -10,060
Goods: exports fob 380,729 397,650 380,976 374,304 409,775 447,199 465,961
Goods: imports fob -381,638 -400,440 -395,573 -387,369 -420,765 -454,495 -476,021
Services balance -14,056 -13,278 -9,738 -8,923 -9,817 -10,447 -9,524
Primary income balance -37,737 -31,337 -30,071 -28,450 -28,318 -33,024 -35,848
Secondary income balance 21,525 22,772 24,131 26,527 29,674 31,668 34,393
Current-account balance -31,178 -24,633 -30,276 -23,912 -19,451 -19,099 -21,039
External debt (US$ m)
Debt stock 406,420 442,272 426,435 422,657 446,135c 475,206 500,959
Debt service paid 41,607 49,368 54,277 79,076 56,386c 63,239 68,528
Principal repayments 20,201 29,393 31,909 59,130 40,183c 44,651 47,542
Interest 21,406 19,975 22,369 19,947 16,203c
18,589 20,986
International reserves (US$ m)
Total international reserves 181,019 195,917 177,990 178,373 175,318 174,681 176,399
a Actual. b Economist Intelligence Unit forecasts. c Economist Intelligence Unit estimates. d Seasonally
adjusted.
Source: IMF, International Financial Statistics.

Mexico 12
Quarterly data
2016 2017 2018
3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr
Non-financial public sector (Ps bn)
Revenue 1,162.3 1,344.3 1,477.8 1,177.4 1,116.2 1,176.2 1,260.0 1,240.6
Expenditure 1,299.1 1,583.6 1,189.8 1,344.7 1,195.5 1,452.6 1,376.5 1,414.3
Balance -136.8 -239.3 288.0 -167.3 -79.3 -276.4 -116.5 -173.7
Industrial production (2003=100)
General 104.3 105.0 103.6 103.0 103.7 104.0 102.8 104.4
Manufacturing 109.1 110.3 111.5 111.1 112.7 112.3 111.3 114.8
Mining 88.3 85.6 84.4 82.5 78.8 78.1 79.3 77.4
Employment, wages and prices
Employment (% change, year on year)a 2.6 1.1 2.1 1.5 0.8 1.4 2.0 3.0
Unemployment rate (% of the labour
4.1 3.5 3.4 3.4 3.5 3.4 3.2 3.3
force)
Consumer prices (Jun 16th-31st
90.5 91.5 93.4 95.0 96.3 97.6 98.4 99.3
2010=100; seasonally adjusted)
Consumer prices (% change, year on
2.8 3.3 5.0 6.1 6.5 6.6 5.3 4.6
year)
Producer prices (Jun 2012=100;
109.9 113.2 117.2 116.3 116.1 119.6 121.5 n/a
seasonally adjusted)
Producer prices (% change, year on
5.8 8.7 11.5 8.2 5.7 5.7 3.6 n/a
year)
Financial indicators
Exchange rate Ps:US$ (av) 18.73 19.80 20.39 18.58 17.82 18.92 18.77 19.38
Exchange rate Ps:US$ (end-period) 19.50 20.73 18.81 17.90 18.13 19.79 18.33 20.06
Deposit rate (av; %) 1.3 1.9 2.4 2.7 2.8 2.9 3.0 n/a
Lending rate (av; %) 4.8 6.0 7.0 7.3 7.4 7.7 7.8 n/a
3-month money market rate (av; %) 4.6 5.4 6.4 7.0 7.4 7.4 7.8 n/a
M1 (end-period; Ps bn) 3,488 3,868 3,782 3,806 3,859 4,264 4,139 4,286
M1 (% change, year on year) 14.1 15.5 14.6 10.6 10.6 10.2 9.4 12.6
M2 (end-period; Ps bn) 7,208 7,670 7,541 7,682 7,873 8,388 8,315 8,552
M2 (% change, year on year) 9.4 13.3 10.8 8.3 9.2 9.4 10.3 11.3
BMV stockmarket index (% change, year
-3.3 -11.9 -2.1 14.6 14.6 13.3 -2.5 -14.7
on year)
Sectoral trends
Crude oil production (m barrels/day) 2.14 2.07 2.02 2.01 1.88 1.88 1.90 1.87
Crude oil production (% change, year on
-5.6 -9.1 -9.5 -7.5 -12.0 -9.1 -6.0 -7.3
year)
Foreign trade and payments (US$
m)
Exports fob 94,919100,135 94,709102,657101,851110,184105,242113,842
Manufacturingb 85,571 89,577 83,651 92,037 91,666 97,091 91,462 99,866
Oil 5,266 5,454 5,489 5,091 5,721 7,401 7,286 7,934
Imports fob 100,155100,963 97,480102,959107,901112,030107,019116,615
Intermediate goodsb 75,965 76,470 75,171 79,760 82,520 84,572 82,060 89,927
Trade balance -5,236 -828 -2,771 -302 -6,049 -1,846 -1,777 -2,773
Services balance -2,377 -2,804 -2,225 -2,774 -2,965 -1,853 -1,665 -3,283
Primary income balance -4,666 -6,327 -12,388 -6,263 -3,405 -6,263 -12,293 -6,622
Net transfer payments 6,959 7,000 6,975 7,720 7,785 8,095 7,257 9,130
Current-account balance -5,483 -3,140 -10,605 -1,804 -4,922 -2,121 -8,763 -3,882
Reserves excl gold (end-period) 175,359173,536173,896170,598169,916170,458172,435173,172
a Registered with the Mexican Social Security Institute. b Including maquila.
Sources: IMF, International Financial Statistics; Banco de México, Indicadores Económicos; Instituto Nacional de Estadística
y Geografía; Secretaría del Trabajo y Previsión Social.
Monthly data
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Exchange rate Ps:US$ (av)
2016 17.98 18.48 17.74 17.49 18.04 18.65 18.57 18.48 19.14 18.95 19.94 20.51
2017 21.37 20.38 19.41 18.76 18.79 18.19 17.85 17.81 17.80 18.72 18.98 19.06

Mexico 13
2018 19.00 18.63 18.68 18.35 19.49 20.31 19.12 18.81 n/a n/a n/a n/a
Exchange rate Ps:US$ (end-period)
2016 18.45 18.17 17.40 17.40 18.45 18.91 18.86 18.58 19.50 18.84 20.55 20.73
2017 21.02 19.83 18.81 19.11 18.51 17.90 17.69 17.88 18.13 19.15 18.58 19.79
2018 18.62 18.65 18.33 18.86 19.75 20.06 18.55 19.07 n/a n/a n/a n/a
Public sector budget revenue (Ps m)
2016 364.2 313.4 381.2 627.7 327.0 325.4 372.5 460.8 328.9 372.2 339.7 632.3
2017 -4438.8 351.9 719.2 433.7 367.6 376.2 415.2 368.8 332.2 376.7 376.5 422.9
2018 464.2 388.9 406.8 455.9 378.5 406.2 511.1 n/a n/a n/a n/a n/a
Public sector budget expenditure (Ps m)
2016 415.6 330.5 364.2 409.7 431.0 514.0 401.5 516.3 381.3 345.6 407.8 830.2
2017 -4905.9 355.7 392.4 376.8 362.6 605.3 437.8 380.6 377.1 353.5 387.6 711.4
2018 493.4 440.7 442.3 433.0 413.8 567.4 434.7 n/a n/a n/a n/a n/a
Public sector budget balance (Ps m)
2016 -51.5 -17.0 17.0 218.0 -104.0 -188.6 -29.0 -55.5 -52.3 26.7 -68.1 -197.9
2017 467.1 -3.8 326.9 56.8 4.9 -229.0 -22.6 -11.8 -44.9 23.2 -11.1 -288.5
2018 -29.2 -51.8 -35.5 22.9 -35.3 -161.3 76.4 n/a n/a n/a n/a n/a
M1 (% change, year on year)
2016 14.2 14.1 14.5 13.5 15.0 15.9 14.3 13.7 14.1 13.2 16.6 15.5
2017 15.6 16.1 14.6 14.9 10.6 10.6 10.6 8.9 10.6 11.6 9.4 10.2
2018 6.9 7.3 9.4 8.7 11.1 12.6 9.2 n/a n/a n/a n/a n/a
M2 (% change, year on year)
2016 4.9 4.3 5.9 5.8 6.2 8.2 8.9 8.3 9.4 9.6 13.0 13.3
2017 11.9 12.4 10.8 10.2 8.7 8.3 8.8 8.8 9.2 10.1 9.4 9.4
2018 8.4 9.1 10.3 11.2 12.0 11.3 8.5 n/a n/a n/a n/a n/a
Industrial production (% change, year on year)
2016 1.8 1.2 1.3 -0.4 1.0 0.8 -1.0 -1.1 -1.8 -0.1 1.4 -0.1
2017 -0.1 -0.6 0.1 -0.4 -0.4 -0.2 -0.5 -0.1 -1.1 -0.8 -1.4 0.1
2018 -0.4 0.5 -0.1 0.2 0.2 0.5 n/a n/a n/a n/a n/a n/a
Retail sales (% change, year on year)
2016 5.5 5.5 7.1 9.6 8.3 9.5 8.5 7.9 8.3 9.6 10.5 9.9
2017 4.6 7.4 3.2 4.5 3.8 0.4 0.4 -0.2 0.1 -0.5 -1.7 -1.3
2018 0.2 1.1 4.3 0.2 2.5 4.0 n/a n/a n/a n/a n/a n/a
Unemployment rate (% of the labour force)
2016 4.2 4.2 3.7 3.8 4.0 3.9 4.0 4.0 4.1 3.7 3.5 3.4
2017 3.6 3.4 3.2 3.5 3.6 3.3 3.4 3.5 3.6 3.5 3.4 3.1
2018 3.4 3.2 2.9 3.4 3.2 3.4 3.5 n/a n/a n/a n/a n/a
Deposit rate (av; %)
2016 0.7 0.8 1.1 1.1 1.1 1.1 1.3 1.4 1.4 1.6 1.8 2.2
2017 2.3 2.5 2.6 2.7 2.7 2.7 2.8 2.8 2.8 2.8 2.8 2.9
2018 2.9 3.1 3.1 3.1 3.1 n/a n/a n/a n/a n/a n/a n/a
Lending rate (av; %)
2016 3.6 3.9 4.3 4.1 4.2 4.3 4.7 4.8 4.9 5.3 5.6 6.9
2017 6.6 7.0 7.2 7.3 7.3 7.4 7.3 7.5 7.5 7.5 7.5 8.1
2018 7.7 7.8 7.9 7.9 7.9 n/a n/a n/a n/a n/a n/a n/a
Stockmarket index (BMV; end-period, October 1978=0.78)
2016 43,631 43,715 45,881 45,785 45,459 45,966 46,661 47,541 47,246 48,009 45,316 45,643
2017 47,001 46,857 48,542 49,261 48,788 49,857 51,012 51,210 50,346 48,626 47,092 49,354
2018 50,456 47,438 46,125 48,358 44,663 47,663 49,698 49,548 n/a n/a n/a n/a
Consumer prices (av; % change, year on year)
2016 2.6 2.8 2.6 2.5 2.6 2.5 2.7 2.7 3.0 3.1 3.3 3.4
2017 4.7 4.8 5.3 5.8 6.2 6.3 6.4 6.7 6.4 6.4 6.7 6.8
2018 5.5 5.3 5.0 4.5 4.5 4.6 4.8 4.9 n/a n/a n/a n/a
Producer prices (av; % change, year on year)
2016 2.9 3.3 2.9 2.9 4.0 4.9 5.2 5.6 6.6 7.3 8.6 10.2
2017 12.3 11.6 10.7 9.7 8.6 6.5 6.0 6.0 5.0 5.7 6.1 5.1
2018 3.4 3.1 4.2 4.8 6.9 9.5 9.0 8.4 n/a n/a n/a n/a
Total exports fob (US$ m)
2016 24,687 28,966 31,493 30,387 31,410 31,949 29,773 32,446 32,701 32,596 34,344 33,195
2017 27,316 31,345 36,048 31,768 35,342 35,548 32,155 35,926 33,771 36,716 37,489 35,979
2018 30,719 35,078 39,446 37,181 39,177 37,484 36,721 n/a n/a n/a n/a n/a
Total imports cif (US$ m)
2016 27,978 29,749 31,407 32,495 31,852 32,466 31,597 34,330 34,228 33,493 34,265 33,204
2017 30,787 30,585 36,108 30,868 36,545 35,547 33,685 38,511 35,705 38,967 37,081 35,982

Mexico 14
2018 35,138 34,148 37,732 37,470 40,764 38,381 39,610 n/a n/a n/a n/a n/a
Trade balance fob-cif (US$ m)
2016 -3,290 -783 86 -2,109 -442 -517 -1,825 -1,884 -1,527 -898 79 -9
2017 -3,471 760 -60 900 -1,203 1 -1,531 -2,585 -1,934 -2,251 408 -3
2018 -4,420 930 1,713 -289 -1,587 -897 -2,889 n/a n/a n/a n/a n/a
Foreign-exchange reserves excl gold (US$ m)
2016 171,983 173,636 174,892 177,108 174,629 173,686 174,427 172,744 175,359 171,916 171,341 173,536
2017 171,996 174,893 173,896 171,852 171,223 170,598 170,385 169,617 169,916 171,523 169,015 170,458
2018 174,115 172,526 172,435 172,106 173,387 173,172 n/a n/a n/a n/a n/a n/a
Sources: IMF, International Financial Statistics; Haver Analytics.
Annual trends charts

Mexico 15
Quarterly trends charts

Mexico 16
Monthly trends charts

Mexico 17
Comparative economic indicators
Basic data
Land area
1,964,375 sq km
Population
128.6m (2016; UN estimate)
Main towns
Mexico 18
Population (m), 2010 (government data for metropolitan areas)

Mexico City (capital): 20.1
Guadalajara: 4.4
Monterrey: 4.1
Puebla: 2.7
Climate
Tropical in the south, temperate in the highlands, dry in the north
Weather in Mexico City (altitude 2,309 metres)

Hottest month, May, 1226°C (average daily minimum and maximum); coldest month, January, 6
19°C; driest month, February, 5 mm average rainfall; wettest month, July, 170 mm average rainfall
Languages
Spanish is the official language. More than 60 indigenous languages are also spoken, mainly
Náhuatl (1.2m speakers), Maya (714,000), Zapotec (403,000) and Mixtec (387,000)
Measures
Metric system
Currency
Peso (Ps). Average exchange rate in 2017: Ps18.93:US$1; end-2017 rate: Ps19.79:US$1.
Time
Mexico City is six hours behind GMT
Public holidays 2017

January 1st (New Year’s Day); February 5th (Constitution Day); March 19th (Benito Juárez);
March 29th (Maundy Thursday); March 30th (Good Friday); May 1st (Labour Day); September
16th (Independence Day); November 19th (Mexican Revolution); December 25th (Christmas Day)

Mexico 19
Political structure
Official name
United Mexican States
Political divisions
31 states and the Federal District (Mexico City); states are divided into municipalities
Form of government
Presidential, with a constitutionally strong Congress
The executive
The president is elected for a non-renewable six-year term and appoints the cabinet
National legislature
Bicameral Congress: 128-member Senate (the upper house), elected for a six-year term, with 64
seats elected on a first-past-the-post basis, 32 using the first minority principle and 32 by
proportional representation; 500-member Chamber of Deputies (the lower house), elected for a
three-year term, with 300 seats elected on a first-past-the-post basis and 200 by proportional
representation
Regional governments
State governors are elected for six-year terms; each state has a local legislature and has the right
to levy state-wide taxes; municipal presidents are elected for three-year terms
Legal system
Mexico 20
There are 68 district courts and a series of appellate courts with a Supreme Court; federal legal
system, with states enjoying significant autonomy
National elections
Elections were held on July 1st 2018 (presidential and congressional). Congressional elections will
be held in July 2021.
National government
The president, Enrique Peña Nieto of the Partido Revolucionario Institucional (PRI), heads a
minority government
Main political organisations

Government: PRI
Opposition: Partido Acción Nacional (PAN); Partido de la Revolución Democrática (PRD); Partido
Verde Ecologista de México (PVEM); Convergencia; Partido del Trabajo (PT); Partido Nueva
Alianza (Panal); Movimiento Regeneración Nacional (Morena)
President: Enrique Peña Nieto
Cabinet members
Agrarian, territorial & urban development: Rosario Robles Berlanga
Agriculture: José Calzada Rovirosa
Attorneygeneral: Raúl Cervantes Andrade
Communications & transport: Gerardo Ruiz Esparza
Culture: Cristina García Cepeda
Economy: Ildefonso Guajardo Villarreal
Energy: Pedro Joaquín Coldwell
Environment & natural resources: Rafael Pacchiano
Finance & public credit: José Antonio González
Foreign relations: Luis Videgaray Caso
Health: José Narro Robles
Interior: Alfonso Navarrete Prida
Labour & social welfare: Roberto Campa
Marine affairs: Vidal Soberón Salas
National defence: Salvador Cienfuegos Zepeda
Public administration: Arely Gómez González
Public education: Aurelio Nuño Mayer
Public security: Manuel Mondragón y Kalb
Social development: Eviel Pérez Magaña
Tourism: Enrique de la Madrid
Central bank governor

Alejandro Díaz de León

Mexico 21
Recent analysis
Generated on September 21st 2018
The following articles have been written in response to events occurring since our most recent forecast was
released, and indicate how we expect these events to affect our next forecast.
Politics
Forecast updates
Morena gains absolute majority in Chamber of Deputies
September 11, 2018: Political stability
Event
The leftwing Movimiento Regeneración Nacional (Morena) has obtained a simple majority in the
Chamber of Deputies (with 254 seats) after five deputies from the Partido Verde Ecologista de
México (PVEM) joined their ranks.
Analysis
The PVEM had already made some overtures to Morena in recent weeks, stating that it would be
willing to support Morena's agenda and also by renouncing its longstanding political alliance with
the Partido Revolucionario Institucional (PRI). Morena's number of seats in the Chamber of
Deputies has now swollen considerably after several deputies from its left-wing ally, the Partido
del Trabajo (PT), recently joined the party. But it was the switch by the PVEM deputies to join the
Morena party that is more surprising, given that there had been no previous political
arrangements between them. In fact, Morena had been highly critical of the PVEM as a PRI ally in
the past.
The change in party affiliation of the five PVEM deputies, however, has been marred by
controversy; just days before, the Morena-dominated Senate voted to allow the Chiapas
governor, Manuel Velasco (PVEM), to finish his term as governor (ending on December 8th)
despite having been sworn in as a senator (via proportional representation) for the PVEM on
September 1st when the new legislature began its session. Spokespersons from both Morena and
the PVEM denied that giving Mr Velasco license to return to Chiapas was done in exchange for
the PVEM deputies joining Morena. Morena and its allies now have 313 seats, which include 29
seats from the PT and 30 seats from the Partido Encuentro Social (Morena's coalition allies). The
PVEM will be left with 11 seats.
These actions have been heavily criticised, as they have highlighted Morena's ideological
inconsistency in regards to the parties with which it is now making deals, particularly the parties
that it had previously lambasted during the election campaign of the incoming president, Andrés
Manuel López Obrador, who will take office on December 1st. Nevertheless, the arrangement will
give Morena considerably more influence in setting the legislative agenda during the period
before the mid-term congressional elections in three years' time.
Impact on the forecast

We will adjust our forecasts to reflect that Morena now has even greater control of the political
agenda than previously anticipated, at least during the first half of Mr López Obrador's term.
However, reforms requiring constitutional amendments currently remain out of reach, as the
incoming administration lacks the two-thirds majority needed.
Analysis
NAFTA talks enter final stage

Mexico 22
September 10, 2018
On August 31st the US president, Donald Trump, formally notified Congress that he intended to
sign a new trade agreement with Mexico. The prospect of Canada joining this deal—thereby
preserving the three-party structure of the current North American Free-Trade Agreement
(NAFTA)—depends entirely on negotiations that will take place over the next month. We expect
a deal to be hashed out in September, given the deep linkages between all three economies.
Nonetheless, a number of stumbling-blocks remain, most notably on agricultural tariffs and
dispute-resolution mechanisms, and the risk that the US and Canada will fail to reach an
agreement cannot be written off entirely. The two parties have only one month to sort out the
details of issues that have been contentious throughout the past year of trilateral negotiations.
Moreover, both administrations will be hesitant to make major concessions as they seek to
preserve their political capital ahead of the November mid-term elections in the US and the
Canadian federal elections in October 2019.
The latest talks are off to a shaky start

Mr Trump initially announced a self-imposed deadline of August 31st to conclude talks with
Canada, just five days after the tentative deal with Mexico was announced. The August deadline
was important only for the US—the Trump administration originally wanted to push through the
revised USMexico trade deal before the Mexican presidentelect, Andrés Manuel López Obrador,
takes office on December 1st. US law requires the president to give Congress 90 days' notice
before signing a new trade agreement, making August 31st the last possible date to do so.
However, Canadian officials effectively called the Trump administration's bluff: although
Mr Trump has sent the formal notice to Congress as planned, the final text of the agreement needs
to be submitted to Congress only 30 days later, at the end of September.
Negotiations will continue over the next month but will remain tense. The Trump administration's
threat to move forward with a US-Mexico deal that excludes Canada, and its attempt to impose a
tight deadline for Canadian officials to discuss the deal, have reinforced Canadian views that the
US is not negotiating in good faith. Furthermore, in comments to the press in early September,
Mr Trump indicated that the US was in a stronger negotiating position and that he did not intend
to offer concessions to Canada. Although these comments should be understood in the context
of Mr Trump's bombastic negotiating style, they will nonetheless have put the Canadians on
edge. Canadian officials have said that they will not negotiate under duress, nor will they sign a
trade deal that does not offer sufficient benefits to Canada.
A deal would be beneficial to all

Canada arguably has more to lose from a NAFTA exclusion than the US would, given that its
economy is more reliant on NAFTA trade. However, the US is not in as strong a negotiating
position as Mr Trump has implied.
Canada remains the single largest market for US goods exports and its second-largest trade
partner overall, with total bilateral goods trade amounting to US$581.6bn in 2017. This is largely
due to the fact that companies' supply chains have become closely integrated since NAFTA was
introduced in 1994. Mexico is the second-largest market for US goods exports and its third-largest
overall trade partner, with total bilateral goods trade of US$557.6bn in 2017.
The US Chamber of Commerce estimates that some 14m jobs in the US are supported by trade
within NAFTA, and although free trade between the US and Mexico would continue under the
bilateral deal reached in August, many companies—particularly in the manufacturing sector—
have developed their supply chains around NAFTA trade terms and would experience significant
disruption if Canada were to be excluded.
For these economic reasons, it is also heavily in Mexico's favour for Canada to join the agreement.
Mexico has political motivations as well; in general, Mr Trump views multilateral organisations
and trade deals as a constraint on US power, and he generally prefers to deal in bilateral terms.
Both Canada and Mexico would therefore benefit from preserving the existing NAFTA
arrangement and avoiding a bilateral deal in which the US would seek to wield maximum influence.
The outgoing Mexican president, Enrique Peña Nieto, as well as the presidentelect, Mr López
Obrador, have welcomed the tentative US-Mexico agreement, but have called for Canada to be
included in the final deal.
Mexico 23
Areas of agreement
On the positive side, the tentative US-Mexico trade agreement includes several new elements that
Canada has supported and which should help to modernise the deal. For example, the US and
Mexico agreed to raise the rules of origin for the automotive industry to require 75% of all auto
components to have been manufactured in NAFTA countries, up from 62.5% currently, in a bid to
support regional industry and protect against lower-cost foreign competitors (most notably
China). The US and Mexico also agreed that 40-45% of auto parts must be made by workers
earning at least US$16 per hour—an attempt to address the imbalance in relative wages between
auto workers in the US and Canada versus Mexico. Although this will help to make US and
Canadian firms more competitive in this area, some companies have expressed concern that this
will make vehicles more expensive if sufficient parts are not available within North America.
However, in the medium term this move should help to encourage wage increases in Mexico.
The US-Mexico agreement also includes new provisions for digital trade. The Office of the US
Trade Representative has stated that the new terms will eliminate customs duties on digital
products and ensure that crossborder data transfers are unrestricted. The digital economy has
been completely transformed since NAFTA was first implemented in the 1990s, and these
measures draw on more recent free-trade agreements to provide a more modern framework. New
and more robust intellectual property (IP) protection measures were also agreed, which all three
countries have supported.
Several contentious issues remain

However, the main issues that need to be resolved—namely agricultural tariffs and dispute
resolution mechanisms—have been some of the thorniest during the last 12 months of NAFTA
negotiations. On the first, the Trump administration has called on Canada to reduce its high tariffs
on dairy and poultry imports, frequently citing Canada's 270% tariff on dairy products (albeit only
those that exceed the duty-free import quota, which is comparatively generous for the US) as a
stickingpoint. However, these tariffs are part of a broader supplymanagement system—which
includes import quotas, tariffs on above-quota imports and guaranteed minimum prices paid to
farmers—which is meant to cap the supply of these food products on the local market and
therefore support farmers' incomes.
Canadian officials, including the prime minister, Justin Trudeau, and the foreign affairs and trade
minister, Chrystia Freeland, have insisted that they will preserve this supply-management system.
Mr Trudeau is under particular pressure to do so—he faces reelection in October 2019, and the
two main agricultural provinces, Ontario and Quebec, are key support bases for his Liberal party.
Nonetheless, there could be some room for compromise on tariffs by adjusting other parts of this
system. For example, Canada's tariffs take into account financial support that the US provides for
its own dairy industry; if this were to be revised down, or if Canada's duty-free import quota cap
were revised, it could allow tariffs to be reduced, which the US would spin as a victory.
On the other major issue, Canada will be pushing hard for the Chapter 19 dispute-resolution
mechanism—which allows for an independent bilateral panel to rule on trade disputes, as
opposed to national courts—to be maintained. However, the Trump administration has said that
this slows down the resolution process, and successfully managed to have this dropped from its
bilateral deal with Mexico. Canada worked hard to negotiate its inclusion in the original NAFTA,
and is therefore likely to demand some other form of neutral arbitration mechanisms before the
deal can move forwards.
What does this mean for North America?

The US-Canada talks will continue to be tough, particularly as the political goodwill has been
eroded on both sides in recent weeks. However, it is still more likely than not that a deal will be
reached—given the economic importance for all three countries and Mexico's desire to avoid a
new bilateral trade arrangement. Ultimately, efforts to build in higher wage thresholds, strengthen
IP protection and include a more comprehensive set of rules for digital trade will help to bring
NAFTA into the modern era.
The risk of a nodeal scenario cannot be written off entirely—particularly given that Mr Trump is
likely to increasingly set his own policy agenda, following recent reports in the US media that

Mexico 24
White House staff are not following his directions. Nonetheless, we maintain our long-standing
forecast that the renegotiated NAFTA agreement will mainly include changes around the margins,
allowing trade to continue relatively unimpeded within the region. Nonetheless, the tone of
political and diplomatic relations within North America has shifted, and is likely to remain strained
for the duration of the Trump administration.
Venezuela’s migration crisis hits Latin America
September 14, 2018
The number of Venezuelan migrants fleeing their country continues to rise amid a deep political
and economic crisis. The migration wave presents logistical, financial and political challenges
for recipient countries in Latin America, which include not just neighbouring Colombia and
Brazil, but also Peru, Ecuador, and countries further afield including Chile, Argentina and even
Mexico. Amid the challenges posed by the Venezuela migration crisis, there are signs that the
region is slowly beginning to move towards a co-ordinated response.
According to the UN, using data to around mid-year, around 2.3m Venezuelans now live abroad,
with 1.6m having left since 2015. The Venezuelan government has refuted these figures, with the
president, Nicolás Maduro, claiming on September 3rd that only around 600,000 Venezuelans had
left the country in the past two years, and that of these around 90% regretted the decision to
leave. However, Mr Maduro offered no sources for the figures he quoted, while regional statistics
of both legal and illegal Venezuelan immigrants support the UN figures.
Indeed, Luis Almagro, the general secretary of the Organisation of American States (OAS), has
warned that the migration wave could constitute "the greatest exodus in the history of the
Western Hemisphere", suggesting comparisons with the surge of migrants to the EU since 2015
and the 2014 child migrant crisis in Central America.
Venezuelans are fleeing their country at increasing rates because of a deteriorating economy,
authoritarian government and surging rates of violent crime. The brunt of this outward migration
movement was initially felt by Venezuela's neighbours, particularly Colombia and Brazil. However,
the scale of migration is such that countries such as Ecuador and Peru are also beginning to
grapple with the implications of a rapid influx of legal and illegal Venezuelan migrants. Even
countries as far afield as Chile and Argentina have seen a substantial influx of migrants.

Mexico 25
Country-level responses
The recipient countries face immediate challenges in the processing of Venezuelan arrivals. Some
migrants arrive at remote border posts with relatively few facilities. Countries have therefore had
to make provision for food, medical and hygiene supplies, as well as provide temporary
accommodation for new arrivals. In addition, the migrants may have different forms to file when
they arrive, ranging from straightforward right-to-work claims (granted as standard by most
nearby countries under existing reciprocal arrangements) to applications for refugee and asylum
status. This requires more investment in administrative and processing facilities.
Beyond these immediate challenges, regional governments must consider the social and economic
impact of large numbers of Venezuelan arrivals. For example, providing social care for Venezuelans
will put pressure on public services, while some nationals may fear that higher levels of migration
will increase competition for jobs. In addition, locals may resent the creation of temporary
accommodation for migrants, especially if that leads to a rise in crime rates.

Mexico 26
In an example of the tension sparked by the situation, a series of protests and violence has taken
place in the Brazilian border state of Roraima, particularly the city of Pacaraima. In late August
local protestors in Pacaraima attacked migrant camps and set fire to some of their belongings,
allegedly in retaliation to an attack on a Brazilian national by Venezuelan immigrants. In response,
the national government ordered a greater military presence in the area and a judge temporarily
ruled that the border with Venezuela should be closed.
This outbreak of violence reflects the mounting pressure on Roraima and its services. According
to Brazilian statistics, 120,000 Venezuelan immigrants entered the country via Roraima between
June 2016 and June 2018. As a consequence, Roraima's state government points to a 6,500%
increase in attendance at health clinics and a 132% rise in crime since 2015.
Brazil is not alone in experiencing such pressures. In August both Ecuador and Peru tightened
entry requirements for Venezuelan migrants in an effort to stem the flow of arrivals. Venezuelans
can now only enter the two countries with their passports, rather than with the paper IDs that
many used previously. It is difficult for many Venezuelans to obtain passports, owing to high
levels of red tape as well as shortages of paper and ink in their home country, and the move will
impact legal immigration to both countries.
Regional responses
These shared challenges provide an incentive to countries in the region to work together to
address the migration crisis. In late August delegates from Peru, Colombia and Ecuador, all
members of the Andean Community, met to discuss the situation and issued a call for greater co-
ordination, including, for example, the establishment of "humanitarian corridors" in Ecuador,
through which Venezuelan migrants can be bussed onward to Peru. Latin American ministers then
met in Ecuador in early September to press forward with co-ordination.
The new Colombian president, Iván Duque, appears keen to take an active role in the regional
response, reflecting Colombia's status as one of the primary destinations for Venezuelan migrants,
and the country that has been most affected by the crisis so far. Most migrants (regardless of
their end destination) enter through Cucuta and other entry points in Colombia's northeast. Mr
Duque has suggested a temporary migration visa status for Venezuelans that would be valid
across most Latin American countries. His foreign minister, Carlos Holmes Trujillo, has proposed
the creation of a humanitarian fund to help recipient countries to welcome migrants.
A number of further summits are scheduled, indicating growing awareness that the situation
warrants a regional response. The Ibero-American Summit in Guatemala in mid-November will
discuss the issues, while an OAS meeting on September 19th is also set to address the topic.
This greater regional response comes in tandem with a hardening of the regional stance against
Venezuela's government. Tellingly, Ecuador, a long-time ally, has left the Venezuelan-led Alianza
Boliviarana para los Pueblos de Nuestra América (ALBA, the Bolivian Alliance), further isolating
Venezuela. Colombia's government announced in late August that it was withdrawing from
Unasur, an alliance of South American nations, because the grouping has not condemned the
Venezuelan government's actions. Argentina, Chile, Brazil, Peru and Paraguay have also
suspended their membership of Unasur.
A greater regional response may help to standardise country-level mechanisms for receiving
Venezuelan migrants, particularly if proposals are adopted that suggest allocating migrants across
the region, which could even-out concentrations of arrivals in particular cities or border posts.
The situation in Venezuela shows no sign of improving and so the level of migration will continue
to rise.
With many countries in the region apparently seeking to limit Venezuelan arrivals, the risk is that
illegal migration will rise as legal migration falls. This will expose Venezuelan migrants to risks
associated with human-smuggling and trafficking, while also making it more difficult for recipient
countries to assess the scale of migrant arrivals and allocate resources accordingly. On top of this
logistical and financial burden, the influx of Venezuelan refugees has the potential to pose political
challenges for recipient countries. Immigration was, for example, an important (although not the
most pressing) issue in the 2017 presidential election campaign in Chile. In South America, which
has been relatively welcoming of migrants, polarising political debate on the issue could ultimately
become a major challenge for governments in the region.

Mexico 27
Economy
Forecast updates
Current-account deficit widens slightly in January-June
September 10, 2018: External sector
Event
Mexico's current-account deficit reached 0.4% of officially estimated, full-year GDP (US$3.9bn) in
the second quarter of 2018, resulting in a deficit of 1.3% of GDP in the first half of the year
(US$12.6bn). In addition, the country received slightly less foreign direct investment (FDI) but
higher portfolio inflows than in the first quarter.
Analysis
As is typically the case, Mexico's current-account deficit was driven by deficits in the goods,
services and primary income balances, which were not fully offset by a surplus in the secondary
income (transfers) balance (mainly workers' remittances). The deficit in goods came in at 0.5% of
GDP for the year so far, up from 0.3% of GDP a year earlier, driven by strong increases in both
exports and imports (up 11% and 11.6% year on year respectively). Most notably, oil exports have
been on the rebound, up by 43.9% (US$15.2bn) on the back of higher prices.
Services recorded an identical deficit of 0.5% of GDP even though tourism receipts were up by
just 4.3% year on year. Meanwhile, the primary income deficit has reached 1.9% of GDP so far this
year, up slightly from 1.8% of GDP a year earlier. Finally, the secondary income (transfers) surplus
has improved to 1.6% of GDP so far in 2018, up from 1.4% in the same period of 2017, with
remittances growing by a robust 11.6% year on year.
On the capital account side, Mexico recorded US$8.4bn in FDI inflows in the second quarter,
down from US$12.6bn in the first quarter but nonetheless mostly above average compared with
recent quarters. Portfolio inflows grew slightly also, to US$7.2bn. Other investment flows reached
a net negative US$1.6bn and reserves were up by US$911.3m in the quarter.
Overall, Mexico's external profile remains broadly positive, although it is unlikely that this year will
continue the trend of narrowing current-account deficits seen since 2015. Foreign trade and
investment have been little affected by the recent election. A recent preliminary trade deal
between the US and Mexico could have some impact down the line, particularly as some of
Mexico's auto exports could face tariffs (although no higher than 2.5%), but the risk of major trade
and investment disruption is low.

Mexico 28
Our forecast of a current-account deficit of 1.7% of GDP in 2018 is unchanged, with a similar
balance also expected in 2019.
Industrial activity rises slightly in July

September 14, 2018: Economic growth
Event
In July industrial activity rose by 0.2% in month-on-month, seasonally adjusted terms and by
1.2% year on year, according to the statistics agency.
Analysis
As has been the trend in recent months, all four major industrial categories expanded or were
steady in sequential terms, except mining, which contracted. In seasonally adjusted, month-on-
month terms, mining was down by 1.1% (7.1% year on year), with a fall in all three subsectors,
although much of the contraction came from services related to mining. On the positive side,
extraction of oil and gas—the most heavily weighted component—was down by just 0.3%, the
mildest contraction since December. Mining of minerals continued its see-saw performance, falling
by 0.4% after having grown the previous month.
In contrast, construction grew by a robust 1.4% month on month in July (4.4% year on year), led
by other, non-classified construction activities, which was up by 2.5%, and new construction (on
buildings), which was up by 1.4%. Civil engineering (infrastructure) was weakest, growing by just
0.7%. Utilities performed well, growing by 1.2% (4% year on year), driven by electricity (up 1.5%),
which compensated for a 0.4% decline in water and gas. Manufacturing disappointed by
remaining flat compared with the previous month, although this resulted in a 2% expansion in
year-on-year terms. This is the third straight month of non-negative performance for the
subsector.
Although the 1.2% year-on-year growth for the industrial sector is the year's strongest, it remains
comparatively weak compared with the rest of the economy, as it continues to be dragged down
by weaknesses in the oil and gas sector and the volatile performance of manufacturing, which has
been affected by uncertainty over the North American Free-Trade Agreement negotiations. A
preliminary agreement between US and Mexico was hammered out in late August, but
negotiations continue with Canada, and then the respective congresses will need to ratify the
revamped treaty. As such, some uncertainty persists. At least in the short term, it is unlikely that
industrial activity will be major driver of GDP growth.

Our forecast of 2.2% GDP growth in 2018 is unchanged, with a slight softening in 2019 to 2% on
the cards.

Mexico 29
Incoming government to push for tourist train project

September 18, 2018: Policy trends
Event
The president elect, Andrés Manuel López Obrador, will throw his support behind an ambitious
railroad project known as the "Tren Maya", designed to link numerous tourist areas in the
Yucatán Peninsula and southeast Mexico.
Analysis
The Tren Maya project involves a 1,500-km railroad through five states including Campeche,
Chiapas, Quintana Roo, Tabasco and Yucatán, linking up numerous tourist resorts including
Cancún, Tulum, Palenque and Chichen Itzá. The project is being pitched primarily as a tourist and
cultural service designed to facilitate transportation along key routes such as the Mayan Riviera,
as well as to stimulate development in the areas around the railroad. The project's proponents
estimate the cost at between US$6bn and 8bn and that it would take four years to finish.
Although the Tren Maya is shaping up to become the incoming administration's key
infrastructure project, it is fraught with considerable risks and controversies. The first involves
financing, as it is still uncertain how much of the cost will be shared between the government and
the private sector, with public financing being questioned as a result of the government's stated
plans for fiscal austerity. There is also the issue of land rights, which include those of indigenous
communities and communal land owners, as well as environmental concerns, as the railroad will
cross through large swathes of jungle and other protected ecosystems.
Mexico's railway system fell out of favour as a source of passenger transportation in the 1990s,
when the last inter-city services were retired; currently only a small railroad stretch is used for
passengers on a tourist route in northern Mexico; the rest of the system is exclusively used for
freight. A recent attempt to construct a high-speed rail was cancelled shortly after contracts were
awarded. Notwithstanding this setback for the Chinese companies involved in that project, they
may still be interested in Tren Maya. A commuter rail between Mexico City, the capital, and
Toluca is under construction and scheduled to open in 2019.
Mr López Obrador has promised that public tenders for the Tren Maya will be opened shortly
after his inauguration on December 1st. The success of the Tren Maya will largely define Mr
López Obrador's legacy in terms of large infrastructure projects. Another test will be completion of
a new airport in Mexico City.

Our forecast sees the incoming government going forward with the project, albeit with heavy
participation by the private sector and other interested parties.
Analysis
EIU global forecast - Emerging-market contagion risk growing
September 19, 2018: Summary
The past month has been dominated by volatility in emerging-market currencies and growing fears
about the potential for an emerging-market crisis. Investors are on the alert for financial, economic
or political weaknesses and, concurrently, emerging-market vulnerabilities are growing. Genuine
crises have so far been experienced by Turkey and Argentina, and The Economist Intelligence
Unit has marked its growth forecasts for both economies down sharply. The turbulence
experienced by Turkey and Argentina is a reminder of how difficult it can be for policymakers to
regain market confidence where external imbalances are large and levels of foreign-currency debt
are high. When macroeconomic conditions are fragile in this regard, policy credibility, especially
related to monetary policy, becomes central. More recently, we have begun to see some contagion
to other emerging markets as the Argentinian and Turkish crises have intensified. Over the past
month a number of currencies have been hit in the sell-off. Apart from the Turkish lira and
Argentinian peso, which have both seen falls of more than 40% since end-March, the Brazilian
Mexico 30
Real and the South African rand have declined by around 20%. For now, a full-blown emerging-
market crisis should be averted, as few countries share the set of features to the same degree as
Argentina and Turkey, but we expect the number of countries whose currencies will come under
pressure to rise. It is likely that there will be periods of volatility as a number of key trends—
tightening monetary conditions, the global trade dispute and heightened geopolitical risk—
interact in challenging ways for emerging markets.
Global monetary conditions will tighten, albeit at a slower pace than we previously expected,
providing a key trigger that raises the spectre of a full-blown emerging-market crisis. Heightened
international risks will cause some central banks to delay or slow their plans to normalise
monetary policy. However, the Federal Reserve (Fed, the US central bank) remains committed to
raising interest rates. With US unemployment reaching new lows, but inflation remaining
contained, we expect the Fed to continue to raise rates at a steady pace. Reflecting our revised
outlook for US growth—stronger this year and weaker next year, we expect a total of four rate
rises this year, followed by another three in 2019 as the Fed balances the risks of rising inflation
against slowing growth. Most emerging-market economies should be able to weather this pace of
monetary tightening, provided that their trading conditions remain favourable.
The US-China trade war will cause global growth to slow

Since the start of 2018 trade policy has become the biggest risk to our central forecast for global
economic growth. We now expect this risk to materialise in the form of a bilateral trade war
between the US and China, with negative consequences for global growth. Although the trade
dispute between the US and the EU has paused for now, the dispute between the world's two
largest economies shows signs of escalation. The US president, Donald Trump, has moved ahead
with the vast majority of tariff increases on a further US$200bn-worth of Chinese imports. As the
economic effects of these tariffs, and those already imposed in the trade dispute, increase over the
remainder of 2018, we expect the Trump administration to come under increasing pressure to
refrain from further tariff increases. This political pressure, combined with the Republicans' loss of
the House of Representatives in the November mid-term elections, which is our expectation, will
cause the Trump administration to rethink its trade strategy. At the heart of the dispute between
China and the US is a disagreement over intellectual property and China's technology transfer
practices, although the US trade team is divided on this issue, with Mr Trump also focusing on
the US's trade deficit with China. Given this, discussions thus far between the two countries have
failed to resolve the dispute, and a resolution looks unlikely in the short term. By 2019 this will
dampen growth in both economies and act as a drag on growth in the wider global economy.
Combined with softening economic growth in key emerging markets, especially those in Latin
America, we expect global growth to slow to 2.8% in 2019, from 3% in 2018.
Growth in the US and China will slow more than

expected in 2019
The trade war comes at a challenging time for the Chinese economy. Concerns over the strength
of domestic demand have returned, as momentum in both private consumption and investment
has weakened. Central to this slowdown is the deleveraging campaign that began in 2016. The
effects of tighter monetary policy, corporate deleveraging efforts and a crackdown on shadow
financing have become more apparent in the economy this year, having raised the cost and
availability of capital for both firms and consumers. The trade war will lessen the focus on
deleveraging, with authorities needing to take measures to support growth in the short term. We
are likely to see a moderate easing in fiscal policy, such as cuts to taxes and fees, together with an
easing of reserve requirements from the People's Bank of China (the central bank). There is
recognition from policymakers, however, that capacity to support the economy will be limited by
China's debt profile. On these assumptions we recently revised China's growth in 2019 down to
6.2%, from 6.4%. Although we expect growth to be maintained to reach the government's target of
doubling real GDP this decade, the trade war has again raised the spectre of China's financial
vulnerabilities, which will cloud the economy's outlook for the foreseeable future.
The trade war will also affect the US economy, which has so far had a stellar year in 2018. Last
month we revised up our forecast for real GDP growth in 2018 to 2.8% (from 2.7%) to reflect faster
than anticipated growth in the second quarter, of 4.1% in annualised terms, driven by rising
domestic demand and a temporary surge in exports. The economy continues to receive support
Mexico 31
from the Trump administration's fiscal policies, as well as the ongoing strength in the labour
market—the economy has added an average of over 200,000 jobs in JanuaryAugust, and yearon
year wage growth reached 2.9% in August. However, the escalating trade dispute with China will
start to weigh on growth later in 2018 and into 2019—we expect growth to slow in 2019 to 2.2%.
The US manufacturing and agricultural sectors, in particular, will be hit by the trade dispute, and
rising interest rates will cause private consumption to slow. Growth will continue to slow in 2020,
reaching a nadir of 1.3%, as the lingering effects of the trade dispute, higher interest rates and
softening corporate balance sheets result in a business-cycle slowdown. A mild recovery will take
place in 2021-22 as these impacts unwind, with growth averaging 1.8%.
Global trade is adapting to US protectionism

The rest of the world is adjusting to US protectionism by developing regional trade agreements
and diversifying trade partners. The Comprehensive and Progressive Agreement for Trans-Pacific
Partnership (CPTPP) will come into effect in early 2019, after Japan became the second country to
ratify the agreement, and additional countries have expressed interest in joining. We expect more
countries to join the CPTPP in the coming years. Japan became a central player in the push to
finalise the deal after the US withdrew from the agreement. Further demonstrating the country's
commitment to trade liberalisation, Japan signed the world's largest free-trade agreement with the
EU this year. The main elements of the deal include the near elimination of tariffs on Japanese
goods entering the EU, but those applied to EU goods by Japan will be reduced in a phased
manner. Countries in Latin America, Africa and Asia are also looking to develop regional trade
integration. We expect more countries to develop trade ties with new partners, risking the
isolation of the US economy and the market share of US exporters.
Geopolitical risks foreshadow greater volatility

We also note the economic risks posed by the complex and deepening tensions in the Middle
East. Various proxy conflicts between Iran and Saudi Arabia have the potential to further
destabilise the region. Mr Trump's decision to withdraw the US from the Iran nuclear deal is
another signal that the US is inclined to offer stronger support to its traditional allies in the region,
Israel and Saudi Arabia, in the coming years. We expect regional security in the Middle East to
deteriorate following the US withdrawal. The move gives hardliners in Iran the upper hand over
their moderate counterparts, which is likely to lead to a more confrontational foreign policy. Most
worryingly, a proxy conflict between Israel and Iran in Syria has a significant chance of escalating.
After a month-long lull in activity following the upsurge in interventions in April-July, Israel
renewed its attacks on Iranian military assets in Syria in early September, and resumed issuing
warnings about ending Iran's military presence there. For global energy markets, we expect
heightened geopolitical risk in the Middle East to lead to increased volatility in the coming
months.
World economy: Forecast summary
2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
Real GDP growth (%)
World (PPPa exchange rates) 3.5 3.4 3.2 3.7 3.7 3.6 3.4 3.6 3.7 3.5
World (market exchange rates) 2.7 2.8 2.4 3.0 3.0 2.8 2.4 2.7 2.8 2.7
US 2.5 2.9 1.6 2.2 2.8 2.2 1.3 1.7 1.9 1.9
Euro area 1.4 2.0 1.8 2.6 2.1 1.8 1.6 1.7 1.7 1.6
Europe 1.9 2.0 1.8 2.7 2.2 2.0 1.8 2.0 2.0 1.9
China 7.3 6.9 6.7 6.9 6.6 6.2 6.1 5.5 5.2 4.9
Asia and Australasia 4.1 4.3 4.1 4.5 4.5 4.3 4.0 4.1 4.1 3.9
Latin America 1.4 0.5 -0.4 1.2 1.1 2.0 2.2 2.8 2.9 2.9
Middle East & Africa 2.8 2.5 4.2 1.7 2.4 2.2 3.0 3.2 3.5 3.5
Sub-Saharan Africa 4.5 3.0 1.1 2.5 2.9 3.0 3.0 3.6 4.1 4.3
World inflation (%; av) 3.5 3.3 3.8 4.4 5.9 5.1 3.4 3.4 3.4 3.0
World trade growth (%) 3.1 2.2 2.3 5.3 4.0 3.7 3.0 4.0 3.7 3.9
Commodities
Oil (US$/barrel; Brent) 98.9 52.4 44.0 54.4 73.2 72.3 70.0 74.8 77.4 79.5

Mexico 32
Industrial raw materials (US$; % change) -5.1 -15.2 -2.2 20.2 3.9 0.5 -1.1 3.8 -0.7 1.2
Food, feedstuffs & beverages (US$;
-5.2 -19.1 -3.6 -1.0 2.8 0.0 4.1 -0.7 2.9 0.7
% change)
Exchange rates (av)
¥:US$ 105.9 121.0 108.8 112.1 109.6 109.9 104.1 100.0 98.3 97.5
Source: The Economist Intelligence Unit.

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Main political organisations

Central bank governor

Country Report September 2018 www.eiu.com © Economist Intelligence Unit Limited 2018

Impact on the forecast

Country Report September 2018 www.eiu.com © Economist Intelligence Unit Limited 2018

The latest talks are off to a shaky start

A deal would be beneficial to all

Several contentious issues remain

What does this mean for North America?

Country Report September 2018 www.eiu.com © Economist Intelligence Unit Limited 2018

Country Report September 2018 www.eiu.com © Economist Intelligence Unit Limited 2018

Country Report September 2018 www.eiu.com © Economist Intelligence Unit Limited 2018

Country Report September 2018 www.eiu.com © Economist Intelligence Unit Limited 2018

Impact on the forecast

Industrial activity rises slightly in July

Impact on the forecast

Country Report September 2018 www.eiu.com © Economist Intelligence Unit Limited 2018

Incoming government to push for tourist train project

Impact on the forecast

The US-China trade war will cause global growth to slow

Growth in the US and China will slow more than

Global trade is adapting to US protectionism

Geopolitical risks foreshadow greater volatility

Country Report September 2018 www.eiu.com © Economist Intelligence Unit Limited 2018

Country Report September 2018 www.eiu.com © Economist Intelligence Unit Limited 2018

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