Mexico challenges recession with a hot domestic market economy

By Zenyazen Flores

Mexico is defying the possibility of a recession during 2023, supported by a “hot” economy due to the dynamism of the domestic market after the Covid-19 pandemic, record formal job creation in the first three months of the year, and optimism for nearshoring that could bring more activity.

Mexico’s Gross Domestic Product (GDP) grew 1.1% quarter-over-quarter and 3.8% at an annual rate in the first quarter of 2023, according to Inegi’s Timely Estimate.

The domestic market’s growth was better than expected, so analysts revised their growth forecasts for the end of the year upwards.

The Treasury expected oil revenues to moderate from March onwards due to the drop in crude oil prices and denied that the cost of debt would put pressure on public finances.

Mexico’s Ministry of Finance maintained unchanged its 3% growth estimate for the end of the year, considering that, with the GDP data for the first quarter, the growth floor for this year is 2.3%, a figure that is above the 1.6% growth that is the consensus of analysts surveyed by Citibanamex and by the Survey of Specialists of the Bank of Mexico (Banxico).

“In domestic demand, we do not see lethargy or signs of early recession, nothing is written, but internally the economy is strong,” said Rodrigo Mariscal, chief economist at Hacienda, during the Cátedra SHCP 2023.

Mariscal questioned the consensus forecast of 1.6% growth for this year since that estimate implies a contraction of the economy, which is not in the base scenario of the Treasury or Banxico.

“What would happen for the analysts’ consensus to be right? Well, there would have to be a contraction of the economy in some quarters of the year, how much, we believe it will be around 0.4%, which is quite a lot,” he said.

ANALYSTS REVISE GDP FORECAST UPWARDS

After knowing the GDP data for the first quarter, analysts took out their pencils to make new growth forecasts for Mexico, but with the caution that comes with uncertainty due to a slowdown that could turn into a recession.

Banorte said in an analysis note that among the factors that explain the performance of the economy are:

• the positive inertia since December 2022 that drove, especially in January;
• strength in the fundamentals for consumption, such as employment, remittances, and recovery of bank credit;
• lower inflationary pressures;
• and investment spending by nearshoring.

“Growth maintained a robust pace, and we continue to see a relatively good outlook for the rest of 2023″, noted the note in which he recalled that his growth forecast is 2% and already incorporates a possible lower economic dynamism.

Banco Bx+ said in an analysis note that, given the surprising strength the Mexican economy showed at the beginning of the year, they revised their GDP projection for 2023 from 0.8% to 1.9%.

However, the global slowdown, still high inflation, and the lagged effect of monetary tightening still support the expectation of a slowdown in the coming quarters.

“Economic activity at the beginning of the year showed resilience and investments associated with nearshoring, and the T-MEC will continue to support the economy.”

“However, we maintain the expectation that activity will decelerate significantly in the coming quarters,” it warned.

Vector Análisis considered in an analysis note that the quarter’s better data implies a greater “drag” for the remainder of the year and a likely upward revision in the aggregate estimates for 2023, which currently expect growth of 1.6%.

Going forward, he added, the economy is expected to slow, and the performance of the services sector, which has shown greater strength than expected, will be watched.

“The probability of a recession in Mexico is very low,” Vector estimated.

Grupo Financiero Monex said in a note that the global economy continues defying the recessionary logic predicted for 2023, and Mexico has been no exception.

On the contrary, the 1.12% quarterly growth provides a generous base for the full-year GDP calculation, “even when there are moderate declines (slowdown) in the second half of the year, it will be easy for our country to grow by at least 2%.”

With information from Bloomberg