Fitch Ratings Adjusts Mexico’s 2024 Growth Forecast to 2.2%

Fitch Ratings has slightly revised its growth forecast for Mexico in 2024, from 2.4% to 2.2%, citing reduced investment and a slowdown in the industrial, agricultural, and service sectors observed in the last quarter of the previous year.

In its March update of global growth outlooks, the agency noted that while investment would continue to support growth this year, it would not expand at the rapid annual pace of 20% reported in 2023. “A strong recovery in the United States this year will benefit the Mexican economy, but high-interest rates are likely to hinder credit growth,” reads the report.

According to the firm, a more flexible fiscal policy will support growth in 2024, slowing slightly in 2025. The expected growth slowdown to 2% in 2025 reflects a deceleration in the US economy and less favorable fiscal policy. After two months of higher-than-expected inflation in the United States, the Federal Reserve has cut the possibility of an interest-rate cut before June and raised doubts about future decreases. In February, the consumer price index rose by 3.2% compared to the previous year, driven by increased gasoline and shelter prices, surpassing January's 3.1% increase. 

Fitch anticipates that general inflation will decelerate and end this year at 4%, prompting Mexico’s Central Bank (Banxico) to reduce its reference rate. With inflation nearly reaching Banxico's inflation target of 3%, Fitch expects the central bank to begin its easing cycle with a 25-basis-point cut on Mar. 21 from the current 11.25%, followed by similar cuts in May, and further easing to 9.25% by year-end.

However, analysts have anticipated a more conservative approach to interest rate cuts by Banxico based on the latest monthly survey, which indicates that the median consensus expects the reference rate to rise to 9.50% by the end of 2024, up from the previous estimate of 9.25% since October. This suggests that Banxico's rate cuts will be less aggressive, with a projected total reduction of 175 basis points (1.75%) throughout the year, rather than the previously anticipated 200 basis points (2%).

With the current tight monetary policy stance, analysts have revised their forecasts for overall inflation from an annual rate of 4.17% to 4.1% by the year's end. Meanwhile, the projection for core inflation remains at 4.06%. GDP growth expectations for this year remain steady at 2.4% after several months of upward revisions. However, the forecast for 2025 has been revised downward from 1.94% to 1.8%.

In terms of Mexican currency appreciation, this interest rate policy from both countries could result in a slight depreciation by the end of the month if Banxico begins reducing its reference rate at its next monetary policy meeting, according to Citibanamex. The peso's strength, observed since last year, is attributed to a wide interest rate differential with the United States, increased dollar inflows from exports and remittances, capital flow redistribution, peso liquidity, and the nearshoring narrative.

"Recent dollar weakness, amid expectations of the start of the Federal Reserve's rate cut cycle in June, has further supported the recent peso appreciation," Citibanamex stated. The bank anticipates a gradual uptrend in the exchange rate, reaching MX$18.58 per dollar by the end of 2024. This projection considers a slowdown in remittance inflows, moderation in enthusiasm surrounding the nearshoring narrative, and the peso's overvaluation compared to its long-term average.