Mexican Economy Could Slow Down in 3Q22

The global economy continues to suffer from steep rises in inflation and uncertainty regarding supply chains due to the Ukraine war. Mexico continues to stabilize its economy by rising interest rates and benefiting from the vanishing of supply chain bottlenecks.

The global economy is seeing the signs of a longer inflation period but it is still far from the inflationary spiral that took place in the 1970s, according to BBVA Research. The world economy is facing palpable risks in the short term, including the persistence of inflation, tension in debt and emerging markets, a sudden deceleration of the Chinese economy, a stronger recession, stagflation, COVID-19, financial fragmentation in the EU, the war in Ukraine, social tensions and populism.

While Mexico saw a surge in demand during 1H22, this trend is not expected to last long, explains BBVA Research. In 1Q22, Mexico’s GDP grew due to major dynamism in consumption with services showing the largest growth in said period, leading analysts at BBVA Research to modify their annual GDP growth expectations for 2022 from 1.6 percent to 2.0 percent. The Mexican automotive industry assisted in the country’s recent surge as many bottlenecks eased. However, Mexico’s underlying inflation continues to rise as subsidies for gasoline support the country’s non-core inflation with recent decreases. Interest rates have continued to rise due to uncertainty regarding Banxico’s target rate. 

Banxico is expected to raise its target rate to avoid the de-anchoring of expectations, while maintaining a wide interest rate spread. The central bank also reacted to the recent inflationary shocks with an acceleration of its rate of rises, as experts expect the terminal rate to enter the 9.50 percent cycle by the end of 2022, according to BBVA Research’s Situación Mexico 3Q22 Report.

For 2023, the bank’s analysts dropped Mexico’s growth forecast from 2.1 percent to 1.6 percent. The institution also expects a slowdown in employment for 2H22 and for investment in the country to remain 11 percent below 2019 figures, as Mexico continues to seek investment opportunities to regain its pre-pandemic numbers.