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Mexico Recovery Lags Latin America
Country sees gradual recovery, but well below regional peers.
BY LATIN AMERICA ADVISOR
Inter-American Dialogue
Mexico’s economy ended the first quarter on a positive note, expanding in March with gains in industrial output and services, according to data the National Statistics Institute released on May 25. Gross domestic product expanded 1 percent from the previous quarter in seasonally adjusted terms. Despite the stronger indicators, Mexico’s economy remains about 1 percent smaller than it was before the pandemic in 2020, however, and lingering supply chain problems and a lack of business confidence could weigh on the growth outlook, according to Goldman Sachs. What do the latest economic indicators say about Mexico’s economic rebound from the pandemic? What sorts of headwinds stand in the way of faster growth? What can policymakers in Mexico do to advance the recovery and get more people on a stronger financial footing?
Carlos Morales, director for Latin America sovereigns at FitchRatings: Mexico’s latest economic indicators continue to point toward a gradual recovery but well below regional and rating peers. We expect real GDP growth will slow down to 2 percent in 2022 and remain at that level next year. The real GDP level will not reach pre-pandemic levels until 2023, lagging other emerging economies. The limited fiscal impulse, coupled with an early reversal of the monetary policy easing, restrained the economic recovery as authorities prioritized macroeconomic stability. Risks are tilted to the downside given ongoing external disruptions to energy prices and supply chains (such as Russia’s invasion of Ukraine and China’s lockdown measures). External demand from the United States will remain supportive, but on a lesser scale than in 2021. Worse-than-expected U.S. economic growth remains a key risk for Mexico’s recovery. Private investment continues to underperform as a pattern of political interventions generates unease among investors. Most recently, the government’s intention for higher state intervention in the energy sector has affected business confidence despite Congress’ dismissal of the constitutional reform of the electricity sector. Consumption continues to recover to above pre-pandemic levels thanks to the easing of lockdown measures, labor market improvement and rather strong remittances. Nevertheless, high inflation may derail the consumption recovery. Inflation has accelerated to levels not seen since 2001 due to higher commodity prices, supply chain disruptions and pandemic-related demand shifts. We project Mexico’s central bank will continue its policy tightening given the persistence of high inflation and to avoid affecting inflation expectations.
Nicolás Mariscal, member of the Advisor board and chairman of Grupo Marhnos in Mexico City: The 1 percent growth of the Mexican economy in the first quarter is good news. Nevertheless, comparing our economy with the rest of Latin America gives us a better perspective on our performance. As economist Enrique Quintana recently noted, Latin America’s GDP during 2020 and 2021 had an average drop of 0.6 percent. The Mexican economy’s contraction in the same period was 3.8 percent. Growth is very positive, but we need a higher rebound. I’ll mention three public policies that foster economic development. The first is the rule of law. Businesses invest where legislation is clear and enforced. This aspect is crucial as the private initiative makes 86 percent of total investments in the country, and the public sector makes the remaining 14 percent. The second public policy is boosting clean energy. The European Union and the United States will start to require renewable energy supply chains, and businesses are adopting ESG metrics that will demand the same. And third, we need more infrastructure, as it connects people, brings markets and promotes opportunities. According to a study by PricewaterhouseCoopers, Mexico will be among the seven biggest economies by 2050. I have no doubt that we will rise to the challenges and prove the study right.
Carlos Petersen, senior analyst for Latin America at the Eurasia Group: Mexico is in an interesting position regarding its growth prospects. On the one hand, there are some positive tailwinds that could help boost economic growth. Mexico could benefit from higher commodity prices and the overall perception that Latin America is one of the only regions that could benefit from the current environment. More importantly, the growing tensions between the United States and China, the zero-Covid policies of the Asian country and the overall trend of strengthening value chains closer to its end markets are accelerating nearshoring tendencies that have been discussed for some years now. Being so interconnected to the U.S. economy and having the USMCA as a legal and trade framework that provides some guarantees to investments in the country will certainly help boost foreign direct investment and foster economic growth. However, not everything is positive. The same reliance on the U.S. economy represents a risk given the prospects of a recession that would significantly hurt Mexico’s growth. Moreover, domestic policy will continue to represent a hand brake to growth. The nationalistic policies that President López Obrador has implemented in the energy sector, his continuous decisions that hurt business confidence and a lack of investment by the public sector, as well as a lack of incentives that would boost private sector investment, represent major challenges that will not improve at least until the end of this administration. Taking advantage of the tectonic shifts that the war in Europe has caused, as well as the growing decoupling between the United States and China, should lead to big opportunities to boost growth. However, it is far from clear that policy will move in that direction.
Rodrigo Abud Madrid, partner at Baboon Consulting: According to Banxico’s estimates, it would be fair to assume Mexico’s economy will have sluggish economic growth (in the range of 2 percent to 3 percent) until 2024. For this year and next year, GDP is estimated to grow 2.2 percent and 2.4 percent, respectively (0.2 percentage points and 0.5 percentage points below December 2021 estimates). While some reasons behind slow growth derive from international conditions (such as supply chains and geopolitical tensions), part of the challenge comes from within. Mexico’s government remains overly focused on gaining political legroom ahead of the 2024 presidential election. This has displaced economic policy to a secondary level. AMLO’s first landmark project (the AIFA airport) is now open for business but didn’t get the warm welcome many had hoped for. The other two (the Mayan train and the Dos Bocas refinery) are in their final stretch but face fierce opposition due to environmental and technical concerns. Looking ahead, it’s highly likely that bumpy conditions will stay in place. Positively for Mexico, the USMCA renewed spirits for bilateral cooperation (Mexico accounted for 14.3 percent of overall U.S. imports in 2019) and an emerging tendency toward ‘nearshoring’ are paving new opportunities to improve Mexico’s competitive advantage as a manufacturing hub. There are risks involved as well. Failure to promote a positive environment for investment, as well as divergent views on bilateral public policy (labor conditions, energy, environment) could jeopardize the government’s capacity to deliver coordinated action and steer economic growth. Policymakers should remain cautious around inflationary pressures while promoting policies that create financial resilience and legroom for private investment.
Republished with permission from the Inter-American Dialogue's daily Latin America Advisor
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