Growing Inflation Could Cause Economic Deceleration: BBVA

Inflation continues rising following the moderation in economic growth, the rise in the prices of gas and raw materials and the lower consumer demand. The recent signs of moderation suggest that inflation could soon reach record highs, leading to sharper than expected monetary tightening in Mexico, especially given its central bank’s (Banxico) commitment to price stability.

BBVA’s Research estimates that economic growth in Mexico will remain at 2 percent considering the 1H22 rebound, but expects deceleration going forward, according to a study. This deceleration goes hand in hand with the anticipation that inflation will stabilize during 4Q22 and slow down during 2023.  

Policymakers now face a stark trade-off because of higher volatility. While the Bank of Mexico is expected to maintain a tightening stance during 2023, BBVA anticipates the start of a downward cycle in 3Q23. Higher interest rates will raise the financial cost of public debt to 3.4 percent of GDP in 2023, compared to 3.1 percent in 2022. The higher share of non-programmable spending within total public spending will reduce the federal government’s room for maneuver in 2023, forecasts the bank. 

The 1H22 rebound fades, bringing a slowdown in consumption in the face of high prices, higher interest rates and weak growth. While manufacturing bottlenecks are reducing, the outlook for manufacturing is clouded by weakening demand. The world is facing lower and lower consumer demand due to continuous rising prices, which has led to lower expected growth for 2023. Lower growth of the US industry will impact neighboring economies, mentions BlackRock. 

To fight inflation, the Mexican government has implemented an economic and anti-inflation package that aims to address this drop in consumption, especially of items of the basic food basket (canasta basica). Lower consumption of these items could also affect anticipated tax revenues for 2023. Nevertheless, the federal government has said it will prioritize meeting the primary deficit target of 0.2 percent of GDP, but its room for maneuver will be limited by the higher share of non-programmable spending within total public spending, which will increase from 26.5 percent in 2022 to 28.4 percent next year, reports BBVA.