The economic data released yesterday were not good. On the one hand, inflation is rising; on the other, the year began with a contraction.
In the case of inflation, one might expect an impact from the war in Iran, but at least in the fuel index there is no increase—quite the opposite. The government is absorbing the impact by reducing revenue from the IEPS tax, and in the first half of March, energy prices actually declined. The increase came from agricultural products, especially fruits and vegetables, with annual inflation close to 24%. Core inflation, which is the most important because it better reflects the gap between supply and demand, remains above 4.5% annually. This is a point and a half above the target of the Banco de México, which for that reason should not be lowering its policy rate—although it has done so. Even if the war in Iran has not yet shown up in inflation, it is already visible in financial markets, and expected interest rates have been rising, both globally and in Mexico. As a result, it is now more likely that the central bank will have to raise its rate, though not necessarily at the next meeting.
The impact of these higher rates on public finances is not minor. Whether or not the central bank moves its reference rate, the yields investors will demand in each government bond auction will now be higher, especially for longer maturities. This means a higher financial cost for the government, which adds to the “need” to distribute ever more cash to prevent the government from collapsing. These higher expenditures now face lower revenues, because Mexico runs an energy deficit: half of the oil and derivatives we consume, and more than three-quarters of the gas, come from abroad. They must be paid in dollars, which are also becoming more expensive, even if only marginally. Overall, pressure on public finances is now greater than at the beginning of the year—and it was already significant then.
To avoid further surprises, it would be helpful if the economy could grow, since that would mean higher tax collection, the government’s main source of revenue. Unfortunately, that does not seem to be happening. January data for the IGAE were not good. In part, I believe, because the figures from the last quarter of last year created the false impression of a recovery. As we discussed at the time, much of that growth came from data generated by Pemex (crude production, refining, gasoline sales) that are not credible. Even so, January could no longer sustain the illusion of growth.
January usually shows much less activity than December. In raw data, the turn of the year typically brings a drop of between 3 and 5 points in activity (on an index where 2018 = 100). Since this happens every year, the seasonal adjustment applied by INEGI corrects for it, and instead of a decline, we usually see a small increase. This time, however, the drop in the original data was more than 6 points, so the seasonal adjustment was not enough to bring us into positive territory. We ended up with a contraction of nearly one point compared to December, and only a half-point increase compared to January 2025.
That figure is below last year’s growth, which means there is no longer any recovery. February is usually a bit worse than January, and we already have the flash data for manufacturing, which are not promising. If we add high-frequency data from BBVA, which show a contraction in card usage during February, everything points not only to a lack of recovery, but to contraction. And that is before the war.
Prepare yourself. It’s going to be ugly.