Insecurity, inflation, high interest rates, and federal government policies are stacked like bricks in a wall to impede Mexico’s economic growth. While its peers have already made progress to recover the gross domestic product (GDP) lost in the pandemic, Mexico continues to lag behind and without a clear boost for the future. Estimates, surveys and forecasts published this week paint a complicated picture for the second largest economy in Latin America.
The most recent data on gross fixed investment, an indicator that best predicts economic activity, showed a 1.2% drop in May, compared to the previous month, according to the National Institute of Geography and Statistics (Inegi) on Friday. . Construction and the purchase of machinery and equipment were the two items that most pulled investment down, pointing to the resistance of the private sector to invest in the country.
And it is that the investment climate, already affected by the negative rhetoric of President Andres Manuel Lopez Obrador against businessmen, entered a new stage of tension when the White House announced that it would take Mexico to consultations to reverse the closure of the sector energy under the protections of the TMEC, the free trade agreement between countries.
“The high uncertainty surrounding policies is one of the reasons why investment remains weak in Mexico (still almost 10% below the start of the administration in real terms),” the economist wrote in a report to clients. head for Mexico at Bank of America, Carlos Capistran. The TMEC process “will take many months and could end with the imposition of tariffs by the United States and Canada on Mexico. Uncertainty about potential tariffs is a deterrent to investment.”
Capistran and his team expect GDP to grow less than 2% this year and the rate to be zero next year: “We expect growth to slow to 0.0% in 2023 from 1.9% in 2022 (a change 1.0% and 1.7%, respectively). We believe the main driver will be the US slowdown, partly driven by higher interest rates, which we expect will hit Mexico with a lag. The internal factors that will slow down the activity in Mexico are the higher interest rates, the still strict fiscal policy and the renewed uncertainty given the energy dispute of the TMEC”.
At the same time, inflation is not letting up. The Bank of Mexico has nine consecutive increases in the reference interest rate, which is 7.75%. It is expected that the next meeting of the bank’s governing board will decide on another increase, since inflation continues to pick up. This has translated into a higher cost of living for Mexicans and, at the same time, an increase in financing costs, limiting economic activity. In its most recent survey of specialists, the central bank found that inflation expectations worsened. Economists expect prices to rise 7.8% annually by the end of this year.
Part of the reason Mexico’s economic engine remains stuck at a low gear is that businesses and companies that closed due to the pandemic have not reopened. According to a report published this week by the Inter-American Development Bank (IDB) and the independent organization Center for Global Development (CGD), 23% of companies in the formal sector and 32% of companies in the informal sector disappeared between May 2019 and July 2021.
Starting a business has become a headache. A study by the thinktank Ethos and the country’s main employer, the Business Coordinating Council (CCE), showed that insecurity, specifically the collection of the floor fee, is the main obstacle to business. “When asking entrepreneurs about the main problem to operate their business, we observed that in 11 of the 15 cities, insecurity ranks first (in second place is the renewal of licenses and permits),” the organizations assured in a summary of the results published this week. 13% of those surveyed said that they had to pay a flat fee in the last year to be able to work.
The hopes of the Government are in the nearshoring, or the relocation of companies seeking to bring their factories closer to the North American market, amid growing tensions between the US and China. “Another upside risk is that the issue of relocation improves substantially, helping Mexico to quickly gain market share in US imports,” said Capistran, “this would prevent exports from slowing down as much or more than the US economy.”
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