Activity to decelerate throughout 2023
Growth momentum in Mexico surprised to the upside in Q1 2023, when it expanded by solid 3.7% year-on-year (from 3.6% YOY in Q4 2022) and 1% quarter-on-quarter (from 0.6% QOQ in Q4 2022). The outcome was notably driven by strong services (including retail), since income fundamentals were still supportive (including a resilient job market, remittances from expatriates in the US and a rising wage bill). Nonetheless, activity should lose steam gradually throughout the following quarters, mainly as a result of a weaker US economy, which is expected to affect Mexico´s manufacturing sector, tourism (7% of GDP in 2021) and expatriate remittances (4% of GDP). In fact, the latter, in addition to persistent historically high inflation (albeit decelerating at the margin) and tight credit conditions, should contribute to the slowdown of household consumption growth (65% of GDP).
Regarding net exports, while export (39% of GDP) expansion will cool as economic momentum in the US weakens (destination of 78% of exports), it should be mitigated by lower import growth (amid decelerating domestic activity). Regarding private investment, manufacturing will remain a key destination of foreign investments and Mexico tends to benefit from the nearshoring narrative. Aiming to catch on to this tailwind and to bring development to the poorer South, the government announced in June 2023 tax incentives for companies to invest in an interoceanic industrial corridor to be developed in the southern isthmus of Tehuantepec (connecting the Pacific port of Salina Cruz in Oaxaca state with the Gulf coast hub of Coatzacoalcos in Veracruz state) in the hope of competing with the Panama Canal. However, possible downside risk for private investments are related to domestic policy uncertainty. The latter includes a controversial expropriation in May 2023 of part of a section of a private run railroad in the Gulf state of Veracruz to benefit the government´s priority isthmus project.
Solid external and fiscal accounts
The current account deficit should narrow slightly in 2023. The services account deficit (1.1% of GDP in 2022) is expected to improve as freight costs sharply correct from a high comparison base and offset an expected relatively weaker travel surplus amid fewer US visitors. In addition, the primary income deficit should also curb (2.4% of GDP), notably due to lower revenues and dividend repatriations by foreign investors. Moreover, the trade deficit (1.9% of GDP in 2022) is expected to marginally improve as relatively lower energy consumption should contribute to a lower energy trade deficit (2.5% of GDP in 2022). By contrast, the secondary income surplus (4.1% of GDP) should decline, underpinned by weaker remittances on back of a softer US job market. On the financing side, foreign direct investment (2.7% of GDP) will continue to comfortably cover the external account shortfall. In addition, external debt (excluding FDI-related debt) stood at 32.1% of GDP in December 2022 (15.7% of GDP for the public-sector portion). Overall, Mexico should keep its solid external position supported by foreign currency reserves of USD 203 billion (covering roughly 4 months of imports) and a preventive USD 50 billion Flexible Credit Line with the IMF (renewed for two years in November 2021).
Concerning the fiscal accounts, the government is expected to maintain a prudent fiscal policy despite a mild increase in the deficit. The latter can be explained by higher interest payments, an increase in allocation for priority programmes and lower oil tax revenues. Importantly, the 2023 budget departs from an optimistic 3% GDP growth forecast for the year, representing a downside for the budget balance. Last, the Stabilisation Fund is still largely depleted.
The political spectrum influenced by the 2024 general elections
The leftist President Andrés Manuel López Obrador from the Morena party has maintained widespread popularity (approval rating stood at 67% in May 2023). Alongside, the ruling coalition has also increased its dominance among state governments. Its most recent and representative victory was in the state of Mexico in June 2023, bringing the total number of ruled states to 23 out of 31 and encompassing 73% of the population. That said, the government boasts the strongest representation in Congress, holding 277 (out 500) seats in the Lower House and 72 (out of 128) in the Senate, but short of the two-thirds majority needed to amend the Constitution. Nonetheless, when it comes to the judiciary, the government has maintained a somewhat conflicting relationship with the Supreme Court. The Court has often ruled against the President’s reform agenda. For instance, in June 2023, it struck out the remaining segment of an electoral reform which would have significantly eroded the national electoral agency INE’s power. Importantly, with less than a year remaining until the general elections, the political environment has started to be influenced by this event. A new president will be elected to serve for a six-year term (Mexico’s presidency is limited to a single term), alongside the 500 members of the Chamber of Deputies and 128 members of the Senate. Marcelo Ebrard and Claudia Scheinbaum, the former Foreign Affairs Minister and Mexico City’s mayor, respectively, have proven themselves to be the ruling party's most competitive candidates for the presidential ticket (the party will elect its candidate on 6 September 2023). Both stepped down from their positions in June 2023 to dedicate themselves to the race. According to preliminary pollsters, the Morena party has maintained a comfortable lead of more than 20 percentage points over the conservative Nationalist Action Party (PAN) and the centrist Institutional Revolutionary Party (PRI).