10 minute read 10 December 2021


At the cusp of recovery

Daniel Zaga

Daniel Zaga


Alessandra Ortiz

Alessandra Ortiz


Mexico posted a steady recovery in 2021, but reversing the losses suffered in 2020 will take time. A nearshoring opportunity, however, can fast-track the country’s growth.

From crash to recovery

After witnessing a severe economic contraction in 2020 (–8.2%1), the largest since the Great Depression, the Mexican economy is on course to a reassuring recovery this year. The economy expanded 1%2 quarter to quarter in Q1 of this year and 1.2%3 in Q2. These rates of growth, although indicating a slight downward shift from Q4 2020 when the economy expanded 2.9% quarterly (figure 1), still exceed expectations and can be mainly attributed to the uptick in internal demand thanks to the decent progress made in vaccinations and the easing of mobility restrictions.4

However, in Q3, real GDP contracted by 0.4% with respect to Q2, partly because of the appearance of a third wave of COVID-19,5 which had a significant impact on the services sector (–0.9% quarterly). Other factors that may have weighed down on tertiary activities include high rates of inflation and the recent amendment to the labor law that substantially restricts outsourcing.6 It is mainly due to this amendment, which was approved in April and came into effect on September 1,7 that business support services8 witnessed a contraction of 11.6% in June, 14.3% in July, 26.9% in August, and 13.6% in September.9 However, these figures may not represent a net-loss in the overall GDP, considering other sectors may absorb these apparent leakages. Furthermore, as only legal modifications occurred during this period (June–September), to assess the real impact of the labor reform, it will be prudent to wait for the data for the coming quarters that will no longer have this one-time effect.

Mexican industries (including the automotive sector), meanwhile, have not escaped unscathed from the global supply chain crisis and the consequent shortage of goods.10 The impact, however, has been moderate—in fact, the Mexican industrial sector grew by 0.3% in Q3 2021 with respect to Q2, after expanding 0.4% and 0.8% in Q1 and Q2, respectively.

The short-term outlook for Mexico points to a fragile economic recovery in 2022, as issues in the global supply chains and uncertainty in the labor market are likely to persist for some time.11 We forecast a GDP growth of 3.0% in 2022 versus 5.8% this year (figure 2). However, we acknowledge that lingering industrial concerns mentioned above, a fragile recovery in investment, and new strains of the virus pose downside risks to growth. Furthermore, the sudden increase in consumer prices is leading to higher interest rates, which will make credit more expensive and, thus, act as a barrier to growth.

The dilemma for 2022: Stimulate growth or control inflation

With global economic recovery underway, the prices of raw materials12 are on a steep rise as their demand has exceeded the existing supply. Additionally, fresh outbreaks of COVID-1913 have deterred an extended relaxing of mobility restrictions, posing challenges for companies to operate normally, thus limiting production and leading to goods shortages.14 These factors, in conjunction with exorbitant freight costs,15 have caused an alarming rebound in inflation.16  The interannual rate in Mexico reached 6.24% in October, the highest since December 2017, and has maintained an upward trend ever since (figure 3). In fact, for eight months now, inflation has stayed above the central bank’s upper bound of 4%. 17

With external pressures expected to last a few additional months, inflation will likely remain on the higher end of the spectrum and will force the Central Bank of Mexico (Banxico) to continue its policy of monetary tightening: Banxico raised interest rates by 100 basis points (bps) earlier this year,18 and we anticipate a further raise of 25 bps in mid-December to 5.25%. Furthermore, the US Federal Reserve (Fed) may start to tighten its monetary policy next year,19 a scenario that will likely add supplementary pressure on Banxico.

Higher interest rates remain one of the main risks that the world economy will face in 2022,20 as it would imply less and more expensive credit, which will affect global economic recovery at a time when several countries are still struggling to free themselves from the grip of the COVID-19 pandemic. In addition, higher interest rates will likely increase debt service costs21 for governments that are already heavily indebted, especially in emerging markets.22

Within the region, Banxico has been more conservative in raising the interest rate compared to its regional peers who have acted more aggressively23 (figure 4). For example, compared to Banxico’s 100 bps increase, Brazil raised interest rates by 575 bps since the beginning of this year,24 Chile by 225 bps,25 and Paraguay by 325 bps.26 This places Mexico in a more favorable situation vis-à-vis a future scenario in which the Fed raises its reference rates and all other economies are required to match the increased rates to avoid a capital flight that could impact local currencies.

Meanwhile, by adopting a fiscal policy of avoiding higher foreign debt and keeping the fiscal deficit under control, public finances in Mexico remain in good condition. The 2022 budget proposal27 aims for a 0.3% primary deficit next year compared to an estimated 0.4% deficit this year. Besides, the general fiscal deficit was set at 4.2% of GDP for 2021 and 3.5% for 2022. The new budget should allow the reduction of public debt to 51% of GDP next year, versus 52.2% this year. The latter figure places Mexico at a more favorable position than its emerging peers28—Brazil, for example, is estimated to reach a 90.1% of gross debt as a percentage of GDP in 2022; for Argentina, this figure is 88.6%.29

Additionally, the rebound in commodity prices, particularly oil, could help achieve the government’s fiscal goals, since this good accounts for approximately 16% of total public revenues. For 2022, the Ministry of Finance estimates the average price for Mexican crude to be US$55.1 per barrel,30 something that seems feasible given the current context of elevated commodities prices.31 So far this year, the price has hovered around US$64.1 per barrel, which is slightly above this year’s goal of US$60.6. 

Fixed investment, the weakest link

Fixed investment in Mexico has been on a downward trend for several years now (figure 5), due to the lack of public strategies to shore it up and an unfavorable business environment.32  Another indication of a lack of investments in Mexico is that imports of capital goods33 have been declining. From January to September 2021, capital goods worth US$29,856 million were imported, a volume that is barely comparable to what was imported in the same period of 2016 (US$29,799 million).

This complicated investment environment has been further affected by a series of domestic policies and regulatory decisions focused on restricting private participation and expanding the role of the state in the affairs of the economy.34 The most recent example, although still under discussion in Congress, is an initiative aiming for a constitutional amendment to the workings of the energy sector.35

The bill basically aims to modify the constitutional scheme for the generation and commercialization of electrical energy,36 establishing that the entire power supply chain—generation, transmission, distribution, and supply—will be reserved exclusively for plants owned by the national power company, the Federal Electricity Commission (CFE in Spanish). 

This move does not take into account the fact that these state-owned plants rely on generating power from fossil fuels and are more expensive than other alternatives. The reform has two main implications for Mexico: (1) It places the country in a position contrary to the global movement that seeks to cut down the use of fossil fuels and opt instead for greener alternatives;37 and (2) it negatively affects business confidence in Mexico as the initiative aims to impose roadblocks for the issuance of new generation permits and even comes with the option to revoke existing self-supply permits that had been given under the previous law to small generators.38

However, before it can be passed as a law, the reform bill must be ratified by two-thirds of the upper and lower houses of the parliament, something that at present seems unlikely as the ruling party only has 278 seats in the lower house of the 331 required, and has only 76 out of 86 needed in the upper house.39  Nonetheless, the discussion around the bill and the ruling party’s endorsement have generated widespread skepticism about the future of Mexico’s power industry.

Nearshoring: Will Mexico cash in on the opportunity? 

In light of recent global supply chain disruptions, policymakers and businesses around the world have started to take steps to mitigate the consequences these disruptions may have on them. In fact, these concerns about supply chains came to the fore well before the onset of the pandemic, as the US-China trade war escalated dramatically,40 intensifying fears of countries and businesses depending on certain regions other than China and the United States (mainly Asia) for the provision of critical and strategically sensitive goods. This discussion became more relevant when a revamped North American Free Trade Agreement (NAFTA) took effect in mid-2020, in the form of the US-Mexico-Canada Agreement (USMCA),41 as former US president Donald Trump was trying to reshore companies’ production units back to the United States.

However, production costs are far higher in the United States than in Mexico, a factor that is fueling discussions around nearshoring42 among US companies.43  Mexico is strategically positioned if this scenario becomes a reality, as the country offers close proximity to the US market, a young workforce with competitive wages (figure 6), a range of flexible trade agreements with more than 40 countries, and duty-free access to the United States—advantages that cannot be ignored.44

Although we do not expect a large-scale relocation of supply chains out of Asia,45 at least in the medium term, given that Asian countries remain highly competitive in terms of costs and other comparative advantages, supply chain diversification is on the cards. The question is: Will Mexico be able to take advantage of this opportunity? Let’s illustrate this idea through an example.

According to the data released by Commerce Department’s Office of Textiles & Apparel (OTEXA), US jeans imports increased 32.9% in the first seven months of 2021.46 This spike was driven by a combination of a rebound in jeans production by Asian suppliers and significant contributions from key Western suppliers. US jeans imports from Mexico, as per OTEXA, jumped 55.4% in the first seven months of 2021 to a total value of nearly US$353 million, capturing in the process approximately 18% market share. Furthermore, imports from Nicaragua increased 39.5% and those from Colombia rose 4%. Shipments from Cambodia, in contrast, grew a moderate 5.8% in the same period, those from Vietnam decreased 4%, and from Indonesia declined 23.8%. Jeans manufacturers maintain that, under the current context, they are looking for suppliers that are close by in order to avoid bottlenecks in supply chains and higher transportation costs.47 If Mexico takes cognizance of these developments and acts in time, it can provide a much-needed boost to its economy.

Despite the great advantages that Mexico offers, several factors hamper its potential. On the one hand, low manufacturing costs in Mexico and a large production capacity for a variety of goods position it as one of the best nearshoring destinations for the United States. On the other hand, low levels of productivity48 and lack of specialization in some other goods, such as semiconductors,49 put it on a weaker footing. Another factor that can hinder Mexico benefitting from the nearshoring opportunity is its adverse investment environment. As discussed earlier in the article, some internal policy decisions have damped business confidence and if public policies do not create optimal conditions to attract investments, the nearshoring opportunity may not be fully utilized.

In summary, Mexico’s economic recovery is losing momentum in the absence of a stimulus plan large enough to jump-start economic growth. Moreover, in 2022, the risk of steeper interest rates and higher inflation are likely to remain in place. However, in light of the recent discussions around the possible reorientation of the global supply chains, a nearshoring opportunity has emerged for Mexico, which, if grabbed in time, has the potential to help the country reverse years of slow growth in investment and in fact propel it to higher growth in the coming years.

  1. Dave Graham, “Mexico’s economy in 2020 suffers worst slump since 1930s ,” Reuters, January 29, 2021. View in Article
  2. Focus Economics, “Mexico GDP Q1 2021: Economy shows resilience in the first quarter ,” May 26, 2021.  View in Article
  3. Maya Averbuch, “Mexico’s economy is seen picking up after second-quarter miss ,” Bloomberg, July 30, 2021. View in Article
  4. Ibid. View in Article
  5. Dave Graham, “Mexican economy shrinks for first time since rebound from pandemic ,” Nasdaq, October 29, 2021. View in Article
  6. Anthony Harrup, “Mexican economy falters in 3Q; services decline amid Covid-19 restrictions ,” Market Watch, October 29, 2021. View in Article
  7. Deloitte, “Labor outsourcing: Opinion approved by the Chamber of Deputies ,” May 2021.  View in Article
  8. Companies dedicated to outsourcing or subcontracting human resources.View in Article
  9. INEGI, “Global indicator of economic activity ,” accessed November 2021.  View in Article
  10. Christine Murray, “Mexico’s economic contraction clouds pandemic recovery ,” Financial Times , October 30, 2021. View in Article
  11. Economic Commission for Latin America and the Caribbean (ECLAC), Economic survey of Latin America and the Caribbean 2021: Labour dynamics and employment policies for sustainable and inclusive recovery beyond the COVID-19 crisis , October 2021.  View in Article
  12. BFG Packaging, “The raw material shortage crisis is now a worldwide-spread phenomenon ,” June 2, 2021. View in Article
  13. BBC , “Covid map: Coronavirus cases, deaths, vaccinations by country ,” November 30, 2021.  View in Article
  14. Peter S. Goodman, “How the supply chain broke, and why it won’t be fixed anytime soon ,” New York Times , October 22, 2021. View in Article
  15. Adam Malik, “How high could container costs go? ,” Auto Service World, November 3, 2021.  View in Article
  16. Maximiliano Appendino, “Latin America’s inflation challenge ,” International Monetary Fund (IMF), November 16, 2021. View in Article
  17. Reuters, “Mexico’s inflation seen at highest level in four years in October ,” November 5, 2021. View in Article
  18. Banxico, “Money market representative interest rates - (CF101) ,” accessed November 2021.  View in Article
  19. Jeff Cox, “Fed to start tapering bond purchases later this month as it begins pulling back on pandemic aid ,” CNBC , November 3, 2021. View in Article
  20. Jeff Cox, “The market is starting to price in more interest rate hikes than the Fed is indicating ,” CNBC , October 28, 2021. View in Article
  21. James Garrett Baldwin, “Interest rates affect the ability of consumers and businesses to access credit ,” Investopedia, June 29, 2021. View in Article
  22. Philipp Engler, Roberto Piazza, and Galen Sher, “How rising interest rates could affect emerging markets ,” IMF, April 5, 2021.  View in Article
  23. Chase Harrison, “Chart: 2021 Latin American interest rates rise amid inflation concerns ,” AS/COA, August 18, 2021. View in Article
  24., “Selic interest rate ,” accessed November 2021. View in Article
  25. Central Bank of Chile, “Daily indicators ,” accessed November 2021. View in Article
  26. Central Bank of Paraguay data, accessed November 2021. View in Article
  27. Fitch Ratings, “Mexico’s 2022 budget maintains prudent fiscal stance ,” September 17, 2021. View in Article
  28. IMF, Strengthening the credibility of public finances , October 2021. View in Article
  29. IMF, “Gross dept position (% of GDP) ,” accessed November 2021. View in Article
  30. Government of Mexico, “Public finance and budget ,” accessed November 2021. View in Article
  31. Noah Browning, “IEA revises 2022 average crude oil price assumption,” Globe and Mail, November 16, 2021. View in Article
  32. Mexico News Daily, “Mexico remains out of top 25 attractive economies for investment,” March 24, 2021. View in Article
  33. Any tangible assets that a company uses to manufacture products.View in Article
  34. Daniel Zaga, Alessandra Ortiz, and Jesus Leal Trujillo, Mexico: An exports-led recovery, Deloitte Insights, June 17, 2021. View in Article
  35. Andrew Baker, “Fitch warns of turmoil in Mexico power sector if AMLO reform passes,” Natural Gas Intelligence, November 15, 2021. View in Article
  36. Deloitte, “Electrical reform: The analysis,” accessed November 2021. View in Article
  37. Emma Newburger, “What the COP26 climate conference really accomplished,” CNBC, November 16, 2021. View in Article
  38. Carlos Ochoa, Aldo Gonzalez, and Alberto Esenaro, “Mexican Congress passes electricity reform,” Holland & Knight, March 3, 2021. View in Article
  39. Cas Biekmann, “Sweeping energy reform’s first step is a matter of votes,” Mexico Business News, October 7, 2021. View in Article
  40. Yukon Huang, “The US-China trade war has become a cold war,” Carnegie Endowment for International Peace, September 16, 2021. View in Article
  41. US Customs and Border Protection, “U.S. – Mexico – Canada Agreement (USMCA),” accessed November 2021. View in Article
  42. Nearshoring involves transferring a business operation to a nearby country with the aim of reducing costs.View in Article
  43. Alexander Gilmanov, “What is nearshoring and how you can benefit from it,” TMS, February 24, 2021. View in Article
  44. Thomson Reuters, “Nearshoring: The current solution for foreign trade,” accessed November 2021. View in Article
  45. Semiconductor Industry Association, Strengthening the global semiconductor supply chain in an uncertain era, April 2021.View in Article
  46. Arthur Freidman, “More signs of nearshoring in July jeans import numbers,” Sourcing Journal, September 3, 2021. View in Article
  47. Ibid. View in Article
  48. OECD, “Mexico policy brief: Addressing the productivity-inclusiveness nexus,” January 2020. View in Article
  49. Semiconductor Industry Association, Strengthening the global semiconductor supply chain in an uncertain era. View in Article

Cover image by: Jaime Austin

Deloitte Global Economist Network

The Deloitte Global Economist Network is a diverse group of economists that produce relevant, interesting and thought-provoking content for external and internal audiences. The Network’s industry and economics expertise allows us to bring sophisticated analysis to complex industry-based questions. Publications range from in-depth reports and thought leadership examining critical issues to executive briefs aimed at keeping Deloitte’s top management and partners abreast of topical issues.

Daniel Zaga

Daniel Zaga

Chief Economist | Deloitte Spanish LATAM


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