In the previous part of this column, I analyzed the dynamics demonstrated by the Mexican economy so far this year, which has so far been marked by the persistence of a slow and incomplete recovery. Now I would like to give perspective on the second half of the year and 2023.
It seems to me that there are a series of factors that will adversely affect the country’s economic growth. In the first place, we are facing a slowdown in the US economy that will undoubtedly have a negative impact on the external sector of the Mexican economy. The United States has a problem of very high inflation: at the end of July, prices rose by an average of 8.5% between the years. Although it was good news because prices in July were no longer up compared to June and the annual rate fell from 9.1%, we still had very high levels: the highest in the last four decades and well above the Federal Reserve’s (Fed) inflation target of 2%. To control inflation, the Federal Reserve raises interest rates and reduces the size of its balance sheet in order to achieve a contraction in aggregate demand. In addition, fiscal policy, especially now that the new inflation-reduction law is in place, will be less expansionary, which will also reduce aggregate demand. There is a great debate among economists as to whether or not these policies will cause a recession. But what no one doubts is that for the remainder of this year and next, the US economy will experience a significant economic slowdown. As I mentioned, this will affect both the external engine of the national economy and possibly also remittances, which seem to me to grow in 2023 at a lower rate than in 2021 and 2022.
Second, the monetary policy in Mexico, due to very high inflation, is becoming more restrictive, which will increase financing costs and, therefore, will have a negative impact on consumption and investment, especially in sectors that are more interest rate sensitive, such as construction (a sector, due to the uncertain environment, Extremely weak: its level is 19% lower than the level observed in January 2019). Monetary policy in Mexico is already in a restrictive area. Its neutral level should be between 5.5% and 6% while the current rate is at 8.5%, and is expected to continue increasing for the rest of the year. For this reason, it seems to me that it would be desirable, as soon as there is clear evidence that inflation, especially core inflation, is steadily declining – which I estimate will occur early next year – to begin a cycle of monetary easing.
Third, there are many factors that generate investment uncertainty which, logically, will affect future economic growth. I think the two most important reasons have the same origin: the current energy policy. Not only does this create uncertainty among investors about whether they will have a reliable supply of electricity, competitively priced and non-polluting, but also, as it violates T-MEC, it generates uncertainty about the future of the business relationship. between Mexico and the United States.
Fourth, higher inflation reduces the real disposable income of households, which reduces the dynamism of consumption. The real-time consumption indicators that we have at BBVA Mexico, compiled with high-frequency data, show that consumption so far in the third quarter of the year is starting to lose steam.
Because of the above, it seems to me that economic growth in 2023 will be weaker compared to this year. I estimate it will be in the 1%-1.8% range, which means that the level of GDP the country reached in 2018 will not yet recover. That is, they would have lost to the pandemic, the lack of appropriate policies to counter it, the uncertainty in investment, five years of growth.
Now, this is the short term picture. In the medium term, it seems to me that Mexico can enter a higher growth path if appropriate policy measures are taken. I will write about it in the next installment of this column.