A Polarized Economic Outlook for Mexico
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A Polarized Economic Outlook for Mexico

Photo by:   Mauricio Artieda, Unsplash
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Sofía Hanna By Sofía Hanna | Journalist and Industry Analyst - Tue, 01/03/2023 - 13:54

The year 2023 comes with polarized expectations for Mexico in financial and economic terms. On the one hand, the growth of the nearshoring trend represents a magnet for investment and possibilities for internal change in the country. On the other hand, the global recession expected by experts in the financial sector and inflation put in doubt what will be the country’s outcome for this year.

 

The global macroeconomic environment has become more complex and uncertain, characterized by persistently high inflation levels and a deteriorating growth outlook. This increases the risk of a greater-than-expected tightening of global financial conditions as monetary policy stances tighten globally in a more volatile environment. Within this context, the Mexican economy achieved growth of 4.3 percent year-on-year in 3Q22 due to the dynamism of exports and domestic consumption, which led the government to adjust its growth expectations to 1.9 percent and 2.9 percent for 2022. Bank of Mexico (Banxico) expects GDP to grow by 3 percent in 2022, remaining within the range forecasted by the Mexican government. 

 

Nearshoring plays a key role in economic expectations as US companies are calculating the risks of relying on factories in China to machine their products, while some are already relocating to Mexico. According to the New York Times, during the first 10 months of last year, Mexico exported US$382 billion in goods to the US, an increase of more than 20 percent over the same period in 2021, according to US Census data. Since 2019, US imports of Mexican goods have increased by more than a quarter. “It’s not that China is going to disappear from the American market. It is that there is more openness to look at Mexico and Central America as an alternative rather than depend entirely on China.” Carlos Sarmiento, Commercial Director, Lectra, told the New York Times. Regarding the nearshoring trend, BBVA considers it an opportunity to boost economic growth and, particularly, bank credit to companies. However, it is important to point out that for this relocation to be directed to the South-Southeast region of the country, it is necessary to adjust the energy policy and develop the infrastructure required to facilitate the region’s connection to export corridors.

 

When looking at the other side of the coin, the most relevant risk for the Mexican financial system is that of additional and sustained tightening of financial conditions in the context of high inflation and lower economic growth prospects. Although the country’s economic activity is recovering, financing has not yet reached its pre-pandemic levels. Both corporate and household sectors maintain low levels of indebtedness, according to BBVA Research. Inflation is still far from returning to levels consistent with price stability in most of the world and its degree of persistence is one of the main unknowns for the coming months. Consequently, there is no certainty that the recent easing of financial conditions will continue and, with it, the return of higher levels of volatility in financial markets and its effects on the different institutions of the financial system cannot be ruled out, as stated by Banxico. 


In this environment, it is appropriate to monitor the vulnerabilities and imbalances that could arise in the financial system and affect its proper functioning, since certain external risks have intensified and some internal risks persist. “The main risk for the financial system as a whole is that of a greater and more rapid tightening of financial conditions, although we would add that, given the uncertainty regarding the persistence of inflation, the risk of a policy error on the part of central banks remains latent. This could lead to a considerable impact on economic activity due to monetary policy being tightened beyond what is necessary,” stated BBVA. 

Photo by:   Mauricio Artieda, Unsplash

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