Mexico’s Economy to Continue Growing in 2022, 2023By Miriam Bello | Thu, 09/01/2022 - 11:57
The global economic impact forecasted during the early stages of the COVID-19 pandemic is now materializing and, alongside other conflicts, putting high pressure on national and international economies. Mexico is no exception but its outlook is more promising than that of other countries in the region, explained Alejandro Valerio, Practice Leader, FrontierView.
Prior to the pandemic, Mexico had been growing at a 2 percent annual rate, slightly over what Latin America had been growing as a region but less than what Mexico’s government expected at the time. With the pandemic, “Mexico had the worst economic drop since 1932, which will complicate its recovery. The country is not expected to recover until 2024 due to the great volatility of the markets at the moment,” Valerio said.
FrontierView expects Mexico to grow 1.3 percent in 2023 and 1.8 percent in 2022. So far, the country’s recovery has been better than preliminary estimates. “Unlike the US, Mexico will not enter a recession at the end of this year. For the first two quarters of 2023, economic activity will be lower but the second half will be better. This is related to the bad outlook that is expected in the US.”
There are three variables affecting the recovery in Mexico and the world, said Valerio. The first is China's zero-COVID-19 strategy, which will continue until the second half of 2023 and will keep disrupting global supply chains. FrontierView's “downside” scenario forecasts a 30-45 percent chance that this policy will not end, while its “base line” scenario forecasts a 50 percent chance that the Chinese government enhances vaccine distribution by the end of 2023. Its “upside” scenario forecasts a 15-10 percent chance that China will allow the use of other vaccines to accelerate reactivation.
The second variable is the rationalization of gas and oil by the EU in the wake of the conflict against Ukraine, which is putting pressure on global energy markets. FrontierView's downside scenario projects that there is a 40 percent chance that Russia bans all gas exports to the EU, while its base line scenario forecasts a 50-60 percent chance that sanctions on oil lead to a reduction in gas supplies to the EU.
The third variable is policy changes by the US Federal Reserve System (Fed), as FrontierView forecasts a 15-10 percent chance that accelerating inflation drives the Fed to further increase its base rates. On the other hand, there is a 55-30 percent chance of a rapid monetary tightening slightly below current expectations. These changes will likely influence Mexican policy, which often follows the Fed’s.
Valerio also explained that over 60 percent of the average expenditure of a Mexican household goes to food, alcohol, transportation, housing and utilities. “Today, the country has an inflation of 8.5 percent, which is not ideal, but it is better in comparison to inflation in Brazil, Colombia or Chile, which are already in double digits.”
In Mexico, inflation is mostly seen in food prices since the government has a gasoline subsidy policy. “The best thing would be for the value of the Mexican mix to remain at US$85,” said Valerio. About 32-34 percent on average is spent on discretionary spending and purchasing power factors in the country.
Mexico's purchasing power factors, which are real wages, household savings and remittances, among others, have been affected by inflation. “Remittances remain positive, it is estimated that US$54 million will arrive this year, despite the fact that there is unemployment in the US. This year, Mexico has received US$28 million in remittances,” said Valerio.
All states in Mexico benefit from remittances, some more than others. Other states have also received large public spending, such as Tabasco for the construction of a refinery. States such as Nuevo Leon, Queretaro or San Luis Potosi have benefited due to a larger demand from the US. Employment levels in the latter states are at pre-pandemic levels, despite the loss of 650,000 formal jobs and 2.2 million informal ones during the crisis. In this period, auto exports, plastics and food are the backbone of the market.
Mexico is also better positioned in terms of indebtedness compared to Peru, Brazil and Colombia, a variable that depends also on the political state of the country, said Valerio. In the last elections where six governorships were contested, MORENA won four and now governs over more than two thirds of the country. In addition, the party is likely to retain the presidency in 2024, added Valerio.
“Mexico needs greater regulatory certainty in order to attract more foreign direct investment,” said Valerio. The manufacturing sector is currently the sector that receives the most foreign investment and the continuity of government might reduce regulatory uncertainty, he added.