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Despite the global slowdown, Mexico’s economy has been expanding rapidly and formal employment has been rising, supported by strong domestic demand and exports. The weak recoveries of Mexico’s key trading partners and falling external demand in late 2012 will moderate exports and investment into mid-2013. As world and in particular US demand picks up in late 2013 and into 2014, growth will gradually strengthen to around 3½ per cent by 2014.
The central bank may have to tighten its policy stance as headline inflation has risen and, even though price rises largely result from transitory effects, core inflation has also begun to rise. Fiscal policy should continue to reduce the public sector deficit to preserve Mexico’s strong macroeconomic fundamentals. Tightening should however be gradual in the current uncertain environment. Structural reforms are needed to raise potential growth, notably the rapid passage of the labour market bill that seeks to boost job creation and incomes, and energy sector liberalisation.