Research and analysis

Mexico: latest economic summary

Published 1 June 2014

0.1 Summary

The government has lowered its official forecast for economic growth from 3.9% to 2.7%. It also reinforces message that reforms will deliver benefits in the long-term, but pressure has mounted ahead of the mid-term elections. Energy and telecoms reforms should help kick start the economy when passed next month. Despite the lower forecast, the opportunity for Mexico – and for British business – remains huge.

A slower start than expected

On Tuesday 20 May the Central Bank (Banxico) published its report for 1Q2014. It downgraded its forecasts for growth from 3%-4% to 2.3%-3.3%, arguing that recent trends showed that the economy was performing below its potential. Banxico attributed this to a weaker-than-expected growth of private consumption and investment, as well as the ongoing slowdown in the US economy, which continues to affect the exports which the Mexican economy relies so heavily on (US annualised growth for 1Q2014 was just 0.1%). Senior business people are increasingly of the opinion that some of the blame for lack of growth should be attributed to a misguided fiscal reform, foreseeing no improvement in the second quarter. The Bank agrees, expecting that the underperformance will continue throughout 2014, and potentially into 2015 too.

This downbeat assessment was backed up by the National Institute of Statistics (INEGI), which published its 1Q2014 GDP forecast a few days later. This confirmed that the economy had only grown 0.28% in the previous quarter. The Ministry of Finance was quick to respond, holding a press conference the same day to release its new, readjusted growth estimates for 2014. Deputy Finance Minister Fernando Aportela confirmed that the previous forecast of 3.9% had been overly optimistic and was to be reduced to 2.7%.

Most analysts had been expecting this official downgrade for some time. Prior to the Ministry’s announcement, the IMF, Banxico’s survey and ECLAC had been expecting a lowering of the forecast.

Fundamentals remain strong

However, despite the disappointing growth figures, there is still much to be optimistic about. Mexico’s macro fundamentals are still strong. Moody’s upgrade of the Mexican economy to the coveted ‘A’ in February showed international confidence in Mexico was strong. This confidence was demonstrated again in March, when Mexico successfully issued $1bn worth of 100 year Sterling bonds. Demand far outstripped supply. Mexico has also managed to avoid the volatility in currency markets caused by the withdrawal of the US QE programme; other Emerging Powers have not been so fortunate. These factors have been behind Banxico’s decision to maintain its interest rate target at 3.5%, particularly given the low domestic demand-driven pressures to prices. This is positive news, as it allow for access to cheap credit, which is necessary for investment.

Despite the short term lower growth projections, the economy is still on track in 2014 to align to the average growth rate for the last 30 years, which is 2.66%. It appears that, after the recovery from the 2009 recession, the economy is returning to its long run (low) steady state, implying that, in order to achieve higher sustainable economic growth the government needs to address problems related with productivity.

Where will growth come from?

The main engine for economic expansion this year will need to come from the manufacturing sector and an expansive fiscal policy, financed by a Congress-agreed deficit of 1.5% of GDP. But to maintain higher growth rates in the middle and long term, the country needs to increase its human capital, expand the credit to SMEs, improve country-wide public infrastructure, tackle powerful interest groups and vested interests, and reduce the social inequalities and poverty that inhibit the creation of a solid, dynamic middle class. These issues are all being addressed as part of the structural reform programme. However, the fact remains that everything hangs on the agreement, and then implementation of well constructed policies.

0.2 Comment

Peña Nieto and his Government have made very clear that delivering their historic reform programme is their top priority and essential if Mexico is to progress in the longer term and fulfil its potential. The successful passage of the secondary legislation on energy reform next month should pave the way for rapid implementation which could deliver tangible benefits to ordinary Mexicans – in due course.

0.3 Disclaimer

The purpose of the FCO Country Update(s) for Business (”the Report”) prepared by UK Trade & Investment (UKTI) is to provide information and related comment to help recipients form their own judgments about making business decisions as to whether to invest or operate in a particular country. The Report’s contents were believed (at the time that the Report was prepared) to be reliable, but no representations or warranties, express or implied, are made or given by UKTI or its parent Departments (the Foreign and Commonwealth Office (FCO) and the Department for Business, Innovation and Skills (BIS)) as to the accuracy of the Report, its completeness or its suitability for any purpose. In particular, none of the Report’s contents should be construed as advice or solicitation to purchase or sell securities, commodities or any other form of financial instrument. No liability is accepted by UKTI, the FCO or BIS for any loss or damage (whether consequential or otherwise) which may arise out of or in connection with the Report.