Trump-Mexico relations off to a rocky start

Relations between President Trump and Mexico have got off to an inauspicious start, with spats over the renegotiation of NAFTA, border taxes and, of course, the Wall. From the point of view of Mexico’s economy, three points are worth emphasising. First, while the US holds most of the cards on trade, re-negotiating NAFTA will be a long and arduous process and is unlikely to have a major impact on trade flows over the next year or so. Instead, the immediate risk stems from the uncertainty generated by President Trump’s policies and the associated impact on business investment. Second, the peso is doing its job as a shock-absorber, weakening on speculation of measures to restrict exports to the US, and strengthening as concerns ease. The safety valve of a flexible currency will prove important in the months and quarters ahead. Finally, broader financial conditions in Mexico have tightened as bond yields have spiked, but there is little evidence (yet) of severe market stress. Much remains uncertain, but this is consistent with our view that GDP growth will slow rather than collapse this year.