Mexico Economic Forecast for 2024: Prophecy or Fantasy?

In 2023, economic growth in Mexico outpaced — by a big margin — analysts’ expectations. Most of the surprise came from the fixed investment side and from a more resilient than expected activity in the United States. The bets are on for 2024: on the one hand, most economists anticipate a slowdown; on the other hand, there are some forecasts pointing to a second consecutive year of stellar growth. Nevertheless, almost everyone agrees that the Mexican economy will be able to take home a decent 2024, despite a not-so-favourable global environment.

It is often said that economists spend half their time explaining what will happen in the future, and the other half explaining what went wrong with their forecasts. Since I am an economist, I will devote the first part of this column to trying to explain why the Mexican economy surprised basically everyone — thankfully — to the upside during 2023.

In December 2022, according to a Bank of Mexico (Banxico) survey, the median forecast for real GDP growth for 2023 stood at 0.9% versus 3.9% in 2022. The key drivers behind this were that the US economy was expected to fall into a brief and shallow recession by midyear, and it was believed that Banxico’s aggressive monetary tightening would constrain private consumption and fixed investment.

On the contrary, economic activity in the United States was remarkably resilient and, furthermore, the latest projections from the Federal Reserve point to a 2.6% growth rate in 2023. So that was one big upside. Also, no one was prepared for fixed investment to score a double-digit growth rate (nearly 20% as of 3Q), with the federal government ramping up spending on its pet projects as the current administration nears its closure. Of course, this happened while Mexico was experiencing what are believed to be the first effects of the nearshoring phenomena on fixed investment, though it is fair to say that this last bit was fully expected. Finally, private consumption kept showing strength, partly because the unemployment rate tanked to historical minimum levels and partly because of a late post-pandemic reopening supporting household spending on services. All in all, economic growth in Mexico landed somewhere above 3.0% in 2023.

Moving on to the second part of this article, here is why many of us are expecting a more evident slowdown in 2024. The world economy is starting to show some cracks, as a result of monetary policy tightening and a slowdown on global trade of goods. In fact, some regions, mainly the European Union, on the brink of a recession. In the United States, the pain of interest rates is starting to be felt more broadly; furthermore, Jerome Powell and some of his colleagues at the Federal Reserve have warned that the full effect of monetary policy will be felt soon. In this sense, the Federal Reserve expects activity in the United States to slow to 1.4% next year. This is bad news for Mexico, since this might translate into slower dynamics for exports, remittances, and tourism.

Also, real rates in Mexico might partially suppress domestic demand growth this time around. Real forward-looking rates are highly restrictive, standing near 7%, and even though Banxico might start cutting rates as soon as 1Q24, monetary policy will remain well into restrictive territory the whole year. Additionally, public investment will hardly manage to keep up with a double-digit growth rate on top of what was seen in 2023, as some of the pet projects reach maturity or their final construction stages. On top of that, exchange rate appreciation tends to tilt consumer spending from domestic to imported goods, which might not bode well for economic growth, should the peso keep showing some strength. Finally, we must factor in that 2024 is going to be characterized by simultaneous elections in Mexico and the United States, which might have some impact on confidence and investment decisions.

On the bright side, the unemployment rate is expected to remain relatively low in 2024, despite a modest rebound (3.2% versus 2.8%); hence, household consumption might manage to inch higher. Furthermore, nearshoring dynamics will continue supporting Mexico in the medium to long run, maybe more evidently than what we have seen so far. Actually, the big announcements in 2023, like Tesla’s gigafactory in the state of Nuevo Leon, could be just the tip of the iceberg in terms of investment, as this implies that many medium and smaller suppliers will need to be established around the big plants, and, at the same time, local and federal governments would be pressured to invest in infrastructure (transport, energy transmission, public services).

Most analysts expect economic growth to cool down in 2024 to somewhere around 2%, while the minority — namely the economists at the Finance Ministry and the Bank of Mexico — believe the economy  might be able to maintain a pace near 3%. Beyond the discussion of which scenario turns out to be a prophecy and which  emerges as a fantasy, we all agree that, despite what it seems to be a bumpy road ahead, Mexico will take home a decent 2024 in terms of economic growth.