For Mexico’s Economy, 2023 Might Not Be That Cheerful

For all the Mexico watchers, 2022 has been full of surprises, particularly on the economic front, as the expectations for year-end growth have tilted toward a more favorable outlook than earlier in the year. Indeed, Q3 numbers all but certainly have guaranteed that Mexico’s economy will outperform despite current global and domestic headwinds.

In a nutshell, against the backdrop of a cooling US economy, China’s COVID lockdowns, Putin’s invasion of Ukraine, and ongoing regulatory uncertainty at the domestic level, Mexico’s economy is expected to grow by 2.5 percent in 2022, better than the 1.8 percent we forecasted at the beginning of the year. Furthermore, the economy could have another strong quarter in Q4, mainly driven by consumer spending, because of the spillover benefits generated by the World Cup. Yet, as firms assess their strategic plans for 2023, they should expect lower growth next year (1.1 percent) as Mexico’s external sector will be mainly impacted by the upcoming US recession. 

Let’s look first at what happened recently that changed the overall outlook for the rest of 2022, particularly after the stronger-than-expected Q3 data. Mexico's economy grew by 4.3 percent YOY in Q3 on the back of the secondary (4 percent YOY) and tertiary (4.3 percent YOY) sectors. A highlight from the latter is the leisure industry, which was devastated in 2020, but continues to grow in 2022. All in all, exports and consumption continue to shore up the economy as the two GDP components that have greatly benefited in Q3 from the US economic expansion. The positive Q3 numbers have guaranteed that Mexico will grow more than 2 percent in 2022, with a potential upside of growing between 2.5 percent and 3 percent.

By examining the positive performance of the economy amid the current global context, two key items come front and center. Exports have been performing quite well, having a strong Q3 as US demand remained resilient. For example, in August, exports grew by 25 percent YOY (worth US$50.6 billion), mainly driven by manufactured goods, which grew by 27 percent YOY (worth US$45 billion), and oil, which grew by 19.7 percent YOY (worth US$3.2 billion). Moreover, in another surprise to the upside, auto exports have grown by 5 percent YOY throughout 2022 (roughly 2 million units more than 2021 so far), though Mexico’s auto industry continues to cope with microchip shortages stemming from supply chain disruptions. Besides the good performance of exports, consumer spending has remained resilient on the back of a recovery of the labor market, a high volume of remittances, and a dynamic service sector, particularly the hospitality industry, which has benefited from more tourists visiting Mexico in 2022. From January to August, tourist arrivals amounted to 42 million (20 percent YOY), worth US$18.6 billion (58 percent YOY), thus Mexico is not only receiving more tourists, but they are also spending more. Moreover, the volume of remittances continues to shatter previous record years, helping bolster consumer spending across the whole Mexican territory. From January to August, Mexico received US$37.9 billion (15 percent YOY) in remittance inflows stemming from a still-resilient US labor market. 

Even PEMEX, the beleaguered state-owned firm, despite its ongoing operational problems and faltering output, has become a major winner of the volatility roiling the global energy markets. Yes, PEMEX lost MX$52 billion in Q3 stemming from the increase of COGS and the FX volatility generated by the US dollar appreciation. Yet, by analyzing the overarching performance so far, PEMEX’s sales from January to September have increased by 95 percent YOY (worth MX$195.6 billion) driven by high oil prices as the company struggles to increase output. This oil windfall has been the financial leeway that the López Obrador administration has been able to use to subsidize gas prices, helping to tame ongoing inflationary pressures.

PEMEX’s problems, such as declining output and a worrisome debt burden, will continue in the medium to long term because of the lack of structural reforms. But in the meantime, with a Mezcla (Mexico’s oil) riding high, averaging above US$80 per barrel, it is safe to affirm that the state-owned oil firm will have a good year in terms of revenues.     

All these positive numbers are the backstory of Mexico’s growth in 2022. Yet, for 2023, we continue to see a different environment, where lower growth should be expected, meaning tempered expectations for Mexico’s economic performance, which is likely to be better than other Latin American economies but unlikely to be the positive story of 2022. Hence, as executives gear up to face a challenging 2023 that will be characterized by inflationary pressures, domestic regulatory uncertainty, the ongoing war in Ukraine, and a US recession, they should continue betting on Mexico, as its fundamentals remain strong, using scenario planning to meet growth mandates. In this way, firms and executives can smoothly transition from the happy tunes of 2022 to the slower beats of 2023.