Mexico economic outlook, May 2024

Some economists² argue that this slow pace of growth is the price to pay for macroeconomic stability. Over this period, Mexico has avoided any major internal economic crises, and its economic indicators—like inflation and public finance balances—have been less volatile than in other Latin American countries. In particular, the strong appreciation of the peso since 2022 is a sign that financial markets are comfortable with the balance of risks offered by the Mexican economy compared to other emerging economies (figure 2).

While stability and low growth best describe Mexican economic activity in recent years, the fact that this trend may change is also widely discussed by economists.

On the one hand, there is the optimistic view that, as many multinational companies consider relocating their international operations, this trend will greatly benefit Mexico, allowing it to capture unprecedented investment that will fuel faster economic growth and help the country transition from being mostly a middle-income economy to being higher-income one.

On the other hand, concerns have arisen that, after the general election, the political transition would not be entirely smooth. If that’s the case, distortions in public finances or trade balance may dampen economic growth.

Is there any evidence backing either of these two speculations? Given that the general election in June may mark an inflection point, it is worth diving deep into some of the factors underlying these issues.

Solid—but not breakout—growth ahead

Deloitte estimates Mexico’s GDP will grow 2.2% in 2024, then at a 2.1% average rate annually from 2025 to 2030, continuing down the country’s current macroeconomic direction. The trend does not necessarily point to a nearshoring-driven boom, but neither does it reflect a fiscal crisis endangering stability.

Mexico has faced a bumpy road over the last few years. Economically, it was one of the most severely affected countries during the pandemic, not only because of its 8.6% GDP contraction in 2020, but also due to the lag in its recovery, which finally materialized at the end of 2022. In contrast, many other major economies had experienced an almost instantaneous post-pandemic rebound in economic activity.

We suspect that, following a shock as severe as the pandemic, there are still some distortions playing out in Mexico’s economic data, which are generating an illusion that the recovery is more dynamic this time than compared to the past (figure 3). For example, in 2023, instead of sliding toward its traditional rhythm, data showed that GDP remained resilient and grew 3.2%.³ This seemed to suggest that, overall, the economy was accelerating, but figures published more recently show an atypical pattern was playing out in some underlying sectors.

Out of the 10 largest sectors in the Mexican economy, which together account for 75% of total production, eight effectively experienced lower growth rates relative to their longer-run trend or remained at levels close to it.

And only two improved their performance:

1. Financial services accelerated from 4.3% growth in 2022 to 6.1% in 2023, driven by the boom in fintech and -related new products and very high interest rates.
2. Construction was a breakout sector, jumping from 2.9% in 2022 to 15.6% annual growth in 2023.

The impact of that one sector alone was considerable: If construction had grown at its historical rate of 1% per year, overall GDP growth would have been close to 2.4% instead of the 3.2% observed in 2023. What explains this is the large injection of public funds into the construction of infrastructure projects such as the Tren Maya railway or the Dos Bocas Refinery—emblems of the current presidential administration. As these megaprojects near completion, the sector’s growth will possibly diminish, as indicated in early economic data for the first quarter of 2024.

In theory, those projects could eventually lead to economic progress in tourism and fuel production, but those effects would likely take some time to come to fruition. However, there are doubts⁴ that this new infrastructure will truly be beneficial for the Mexican economy in the long term.

Therefore, in our view, it is most likely that economic growth will slow closer to 2% per year in the short term unless another equally disruptive catalyst appears.

What about nearshoring?

As discussed in Deloitte’s last quarterly report on relocation, there is evidence that, globally, investment and trade flows are quickly migrating. A clear example is the collapse of foreign direct investment to China, which reached its lowest level in 30 years in 2023 (figure 5).

At the same time, countries such as Vietnam, India, and even Brazil have enjoyed renewed attention from investors, and although it is not clear that all of it is related to the relocation of firms’ operations, it is certain that large transnational companies face the challenge to rebalance the geographical distribution of their production chains.

For Mexico, the potential upside is enormous, as companies in the Americas consider nearshoring some of their business operations—moving distant parts of their supply chains closer to home. This trend could instigate an economic tipping point. If it were to capture just 15% of the foreign capital that is no longer being invested in China, Mexico would double its current level of foreign investment.

However, so far, the slice of the pie that has been secured is quite small. Deloitte’s Investment Monitor records announcements of nearshoring-related projects in the country worth almost US$40 billion since 2021—but only 60% of those projects have begun construction or production. Official statistics show that total foreign direct investment has stagnated, with 2023 figures falling 0.7% versus 2022 and new investments becoming scarce (figure 6).

Thus, three years after economic relocation trends began to materialize tangibly in the international arena, it seems clear that there are elements that may limit Mexico’s capacity to attract investment. Many of these, such as developing new infrastructure and fighting against insecurity, take a long time to resolve, making it difficult for nearshoring to drive much-needed and anticipated growth.

A fragile equilibrium for public finances?

At the other end of the spectrum are concerns about an economic slowdown, fueled in part by political uncertainty as elections draw near. However, Deloitte’s analysis estimates that although the Mexican economy is not risk-exempt, it is unlikely that the country’s economic course will take a precipitous turn toward endangering macroeconomic stability.

As it stands, the most uncomfortable variable is the government budget: Mexico’s finance ministry announced it expects a deficit of almost 5% in 2024, which not only breaks with the parameters set by the current government but is also the highest in the last 30 years (figure 7). This figure is significantly affected not only by the physical investment expenditures required to finish the administration’s infrastructure megaprojects, but also by other less discretionary expenditures, such as social programs and pensions.

Although the deficit is unusually large, given the recent trajectory of the economy, it will hardly be disruptive to the country’s general fiscal situation. Deloitte’s projections coincide with those from Mexico’s Ministry of Finance, estimating that public debt will rise to levels close to 50% of GDP, which, although higher than the average of 47.7% over the previous five years, does not yet constitute a stinging threat to stability.

To put this in perspective, the International Monetary Fund projects that, overall, public debt in Latin American countries will average around 70% of GDP in 2024. Hence, Mexico’s debt-to-GDP ratio looks better than its regional peers (figure 8).

That does not, however, mean Mexico’s public finances are in a bed of roses. Factors such as the investment requirements of the state-owned petroleum company (Pemex), growing trends of social spending, and a lack of political will to drive fiscal reform, all point toward a deterioration of Mexico’s financial situation.

Mexico thus will need to act fast to soften the worries of the financial markets and avoid a scenario in which the investment grade currently enjoyed by its sovereign debt is called into question before the end of the decade. The Ministry of Finance has promised that the deficit will decrease drastically in the coming years because it will no longer be necessary to inject resources into the construction of priority projects. The fulfillment of this promise will be key to keeping concerns at bay—or preventing their short-term rise, at least.

In the balance

Mexico, the world’s twelfth-largest economy by nominal GDP,⁵ looks to be heading neither toward major, imminent danger nor a huge leap into growth territory.

Currently, the best test will be the presidential elections, slated to be held on June 2, 2024.⁶ According to Oraculus,⁷ the country’s leading poll aggregator, there are two discernible patterns: First, it is likely that Morena, the current ruling party, may retain power, and second, if this happens, it is going to be difficult for it to have full control to decide the country’s policy, as several regional governments and congressional seats would likely pass into the hands of the opposition. With this, Mexico would continue to experience a political tug of war that will generate reluctance to change, with limited risks and opportunities.

In economic matters, some indicators have adopted a position of equilibrium. Inflation, for example, is one of them, for since April 2023, its volatility has decreased considerably, especially with core inflation. Deloitte anticipates that Mexico will end the year with a 4.3% annual inflation rate, close to the current 4.7%, possibly continuing to be in the range of 4% to 5% over much of the next three years.

This will prevent the Bank of Mexico from relaxing its monetary policy stance too much, and although Deloitte estimates its benchmark interest rate to fall from the current 11% to 9.75% in 2024 and 7% in 2025, it would still be one of the highest in Latin America, prolonging the outstanding performance of the Mexican peso. For this variable, we expect a rate of 17.60 pesos per dollar at the end of 2024 and 19.20 pesos per dollar in 2025, after an appreciation of 18% over the last couple of years.

Ultimately, all this reflects that as long as Mexico does not embark on a mission of true structural change, driven by institutional reforms and productive investments, the country will delay growth for longer. For now, all eyes will be on Mexico’s general elections (together with the US presidential elections at the end of the year), as well as the new government’s transition and approach to economic policy.