Economics: The international context holds major implications for the 2022 outlook
With the international economy facing the threat of a significant slowing given the increasing risk of a US deceleration, elevated and persistent inflation, a significant rise in interest rates and financial volatility or uncertainty, Mexican monetary and economic policy officials are facing major challenges. These include for 2022-2023 economic growth that is proving slower than expected along with higher inflation, a further weakening of public finance and heightened country risk over the same two-year period.
Following a major rebound in output during 2H20 and 1H21, GDP has lost considerable momentum as key economic growth drivers (consumption, fixed investment and exports) lost impetus. And while 2022 has begun with a moderate rebound in economic activity, the labor market remains weak as a re-composition of employment is biased toward informal work at the same time as higher inflation imposes a real-term decline in real labor remunerations. This helps describe the economic stalling spiral Mexico has been locked into since 2019, in which diminished GDP growth is insufficient to allow for a firming of the labor market and household incomes, a combination that inhibits growth in consumption and productive investment, which, in turn, keeps a lid on GDP.
Unfortunately, industrial, fiscal and energy policies are not properly focused or lack the necessary margin or efficient instruments to break the stalling cycle in ways we have seen in previous episodes of this nature. On the policy front, it is not yet clear what the presidency and Morena lawmakers and their allies in Congress will decide with respect to the contracts held by private firms in the energy sector. They may reach a solution that would prove satisfactory to both sides and avoid a showdown in the context of the USMCA, although such an outcome is by no means guaranteed.
Furthermore, in 2022 and throughout what remains of the second half of López Obrador’s term of office, fiscal policy will be hamstrung by a lack of revenues with which to finance increasing public spending. Although the international price of crude oil has risen dramatically in recent months due to the Russia-Ukraine conflict, public finance does not stand to benefit.
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