Tuesday, March 5, 2024

OECD improves economic growth forecast for Mexico this year

The Organization for Economic Co-operation and Development (OECD) has made a slight upward revision to its 2023 economic forecast for Mexico and is now predicting 3.4% growth.

The forecast, included in the OECD’s latest Economic Outlook report, is 0.1 percentage points higher than the organization’s most recent previous prediction.

Reforma towers
The OECD believes that growth in the Mexican economy will slow to 2% by 2025. (Diego Simón Sánchez/Cuartoscuro)

The Paris-based organization expects growth in Mexico to moderate to 2.5% next year and fall to just 2% in 2025.

Its forecast for 2023 is slightly above the 3.3% annual growth recorded in the first nine months of the year.

In its Economic Outlook note on Mexico, the OECD said that “consumption will be supported by a strong labor market” and “investment will be backed by public infrastructure projects which are expected to be finalized in 2024 and by the nearshoring of manufacturing activities to Mexico.”

The infrastructure projects it refers to include the Maya Train railroad, the Olmeca Refinery and the Interoceanic Corridor of the Isthmus of Tehuantepec. Those construction projects, and private ones, have already spurred strong growth in Mexico’s disadvantaged south and southeast.

The OECD said that “short-term indicators show consumption remaining resilient and investment trending up, particularly in non-residential construction … [and] in machinery and equipment related to nearshoring.”

“Mexican industrial parks across the United States border are at full capacity. Export growth and manufacturing production have remained solid, particularly in the automotive sector,” it added.

However, “export dynamism will be mitigated by milder growth in the United States” in coming years, the OECD said.

It is predicting that GDP in the United States – which is easily Mexico’s largest trade partner – will expand 2.4% this year, but just 1.5% and 1.7% in 2024 and 2025, respectively.

Cargo trucks
The United States is by far Mexico’s largest trading partner, and the lucrative relationship is set to continue to expand through to 2025, according to the OECD. (Shutterstock)

Mexican exports “will suffer from slower growth in major trading partners but will benefit from deep integration in manufacturing value chains and nearshoring,” the OECD said.

The 38-member intergovernmental organization also offered forecasts for Mexico on a range of other economic indicators.

Inflation

The OECD said that inflation will “edge down” to 3.9% in 2024 and 3.2% in 2025 before returning to the Bank of Mexico’s 3% target by the third quarter of that year.

Mexico’s annual headline inflation rate was 4.32% in the first half of November, up slightly from the 4.26% reading for the entire month of October.

The OECD said that the outlook on consumer prices in Mexico “remains very uncertain,” noting that “inflation may be more persistent than anticipated, if for example energy or commodity prices rise substantially.”

It also said that “monetary policy should remain restrictive to ensure that inflation decreases durably towards its target.”

The bank of Mexico’s benchmark rate is currently set at a record high 11.25%. The OECD said that the rate “is assumed to remain at its current level until the second half of 2024, when it would start to be reduced gradually.”

The federal budget

The OECD said that Mexico’s budget deficit is “expected to increase to 4.9% of GDP in 2024, from 3.3% of GDP in 2023, as budget allocations for social spending, particularly universal non-contributory pensions, and flagship infrastructure projects in the south [of the country] significantly increase.”

Continued infrastructure spending on projects such as the Toluca-Mexico City commuter rail network will increase the budget deficit. (Presidencia/Cuartoscuro)

However, “the deficit will decrease to 2.1% in 2025,” it added.

Unemployment

The OECD noted that unemployment in Mexico is low, with a 2.9% rate recorded in September.

The organization is predicting that unemployment will tick up to 3% next year before rising to 3.1% in 2025.

It said that workforce informality “is hovering around 55%, around three percentage points below the historical average.”

OECD identifies boosting productivity as a “key priority” for Mexico

“Broadening the tax base would help to respond to increasing spending needs in education, health, and infrastructure, safeguard the commitment to debt sustainability, and boost productivity and medium-term growth,” the OECD said in its Mexico note.

However, successive governments have found that reducing informality in Mexico is no easy task. As for tax reform, the two leading contenders to succeed President López Obrador next year, Claudia Sheinbaum and Xóchitl Gálvez, both indicated in recent interviews that making changes to Mexico’s tax system wasn’t a priority for them.

The OECD also said that reducing regulatory costs associated with “formalizing and growing firms … would support stronger formal employment and productivity.”

It added that “improving access to, and the quality of, early childhood education and care would support female labor force participation, foster growth prospects and reduce inequalities.”

Labor market participation in Mexico “is increasing for women, although it remains significantly lower than in regional peers and other OECD countries,” the OECD said.

Female labor market participation reached 46.4% in the third quarter of 2023, according to data published earlier this week, the highest level since records began in 2005.

Mexico News Daily 

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