Home Economy Mexico’s Economic Growth Decouples From the U.S. (Bloomberg)

Mexico’s Economic Growth Decouples From the U.S. (Bloomberg)

(Bloomberg) — Mexico’s economy is probably in for a rough year in 2022, as the boost it gets from U.S. growth is outstripped by blows from tight fiscal and monetary policies and uncertainty over the government’s agenda.

Bank of America Corp. slashed its growth forecast from 2.5% to 1.5%, analysts led by chief Mexico and Canada economist Carlos Capistran wrote in a note Tuesday. Speaking in a video conference afterward, he said Mexico’s production numbers now likely won’t reach pre-pandemic levels until next year.

“Mexico is potentially in a low growth regime,” Capistran wrote. Weak activity data show “the rebound from the initial phase of the pandemic is over and that activity in Mexico is, if anything, moving down again.”

Latin America’s second-biggest economy shrank in the third quarter of 2021, and a poor start to the October-December close to the year suggest the contraction wasn’t entirely due to one-time factors like the peak of Covid-19’s Delta variant, Capistran wrote. The bank also cut its growth estimate for 2021 from 5.8% to 5.2%.

The country has been propelled throughout the pandemic by hefty demand from the U.S., which helped businesses to quickly reopen and expand in the manufacturing heartland on the northern border.

However, Mexico now “seems to be decoupling from U.S. growth,” Capistran wrote. He argues the trend may be explained by the contrast between heavy spending and loose monetary policy in the U.S. versus President Andres Manuel Lopez Obrador’s austerity and the Bank of Mexico’s perennial hawkishness.

Read More: Mexico’s Uneven U.S.-Powered Recovery Leaves Many Regions Behind

External funding has also been drying up, with investor appetite undercut by the president’s “state-centric agenda,” Olga Yangol of Credit Agricole CIB wrote in a note Tuesday. “Lopez Obrador has shown a tendency to centralize decision-making, which has led to institutional erosion and inefficient government functioning.”

He has further spooked investors with statist legislation like an electricity reform bill that seeks to boost the state utility’s market share. “The president is, as he has declared, doing Mexico’s 4th transformation, and all transformation processes imply change and hence uncertainty,” Capistran wrote. “High uncertainty has likely being one of the reasons why investment is very low.”

One of Mexico’s best opportunities for growth this year is “near-shoring” — a push to persuade companies that are moving away from China or want simpler supply chains to base facilities in Mexico, both analysts said. Neither was particularly bullish, however. Yangol noted “the government’s state-centric policy risks undermining the opportunity,” while Capistran wrote it’s unlikely to change this year’s growth “in a significant manner.”

The low growth and decoupling from the U.S. are likely to weigh on the peso, which could weaken from the current 20.4 to the dollar to 22 by the end of the year, Capistran said in the video conference.

Source: Bloomberg

Mexico Daily Post

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