The Bank of Mexico (Banxico) has slashed its economic growth forecast for the Mexican economy in 2024, citing weak growth between April and June and a range of downside risks to economic activity.
In its second quarter report, the central bank said it now anticipates GDP growth of 1.5% this year, down from a 2.4% forecast in its Q1 report.
Banxico also cut its growth forecast for 2025 to 1.2% from 1.5%.
The bank said it cut its 2024 forecast due to weaker-than-expected growth in the second quarter. Data published in late July showed that the Mexican economy grew just 0.2% in Q2 compared to the first quarter, and 1.1% in annual terms.
In the executive summary of its report, Banxico said that “economic growth is expected to be moderate in 2024 and 2025, supported mainly by domestic spending.”
It predicted that private consumption and, “to a lesser extent,” private investment will continue increasing. However, “the contribution of the latter [to growth] would be lower than previously expected, given the lower dynamism that this aggregate has shown and the environment of uncertainty that persists due to both domestic and external factors,” including the federal government’s judicial reform proposal.
The bank said that positive effects from public spending — including expenditure on infrastructure projects — are “still expected,” but are forecast to be lower than previously anticipated.
Although Mexico is on track to set a new record for exports in 2024, Banxico said that “external demand will continue making a low contribution to Mexico’s growth during 2024 as the U.S. manufacturing sector is expected to remain weak.”
Risks to Mexico’s economic growth
The Bank of Mexico said that some downside risks to economic activity “have gained relevance” since the first quarter of the year.
“Thus, the balance of risks to the growth of economic activity over the forecast horizon is now considered to be biased to the downside,” Banxico said.
It said that a number of downside risks stood out. They included:
- The possibility of lower-than-expected growth of the U.S. economy, “to the detriment of Mexico’s external demand.”
- The possibility of uncertainty increasing as a result of election results in different countries around the world (including the United States).
- The possibility that public spending provides a lower-than-expected boost to growth.
- The possibility that geopolitical conflicts negatively affect the global economy and/or international trade flows.
- The possibility that severe weather phenomena adversely affect the Mexican economy.
Banxico Governor Victoria Rodríguez said on a call on Wednesday that “we expect the economy to keep growing in the coming quarters, though at a more moderate pace.”
She also said that U.S. manufacturing should recover and assist growth in Mexico in 2025.
What is the inflation outlook?
The Bank of Mexico cut its benchmark interest rate by 25 basis points to 10.75% in early August even though annual headline inflation hit a 14-month high of 5.57% in July.
The headline rate subsequently declined to 5.16% in the first half of August, but still remains well above the central bank’s 3% target.
In its latest quarterly report, Banxico noted that its headline and core inflation forecasts have not changed compared to those included in its Aug. 8 monetary policy statement.
However, some of the bank’s latest forecasts are different from those in its first quarter report.
Banxico anticipates that the headline inflation rate will be 5.2% at the end of Q3, up from a previous forecast of 4.4%. It sees inflation falling to 4.4% in Q4, a forecast above its previous fourth quarter prediction of 4%.
The central bank anticipates that headline inflation will continue to decline in 2025 before reaching the 3% target in the final quarter of next year. That forecast has not changed compared to the first quarter report.
The central bank has also edged up its core inflation forecast for the end of 2024. It anticipates that the annual core rate will be 3.9% in the fourth quarter, up slightly from a previous forecast of 3.8%.
Banxico sees core inflation trending down in 2025 to reach 3% in the final quarter of 2025.
The bank said that its upward adjustment to its headline inflation outlook “reflects the pressures that have affected non-core inflation.”
“In particular, this revision considers higher than-anticipated variations in the prices of agricultural and livestock products as a result of the supply shocks they have been subject to, as well as greater variations in energy prices, mainly due to the increase in their international references,” Banxico said.
“Given their nature, non-core inflation shocks are expected to fade in the coming quarters. Specifically, supply shocks on agricultural and livestock products resulting from adverse weather conditions tend to reverse relatively fast as production recovers,” it added.
However, the Bank of Mexico also said that the balance of risks for inflation within the forecast horizon is “biased to the upside.”
Among the upside risks is the possibility that the Mexican peso continues to depreciate.
The peso was trading at 19.80 to the US dollar Thursday at midday Mexico City time.
The currency has depreciated about 14% against the greenback since Mexico’s June 2 elections, in large part due to the ruling Morena party’s strong election results and its legislative agenda, including a controversial proposal to allow Mexican citizens to directly elect Supreme Court justices and other judges.
With reports from Reuters
