Dialogue with the Mexican Business Sector: OECD Economic Outlook

 

Remarks by Angel Gurría

OECD Secretary-General

Mexico City, Mexico - 8 January 2020

(As prepared for delivery)

 

 

 

 
Dear representatives of the Mexican business sector, Ladies and Gentlemen,

It is a pleasure to be here with you to discuss the global economic outlook, and the prospects for Mexico, from the OECD’s viewpoint.

Allow me to start with a few comments on the international situation. The OECD recently presented its November Economic Outlook and, frankly, it paints a worrying picture.

There are some positive aspects worth highlighting, such as the recovery in employment and household consumption in some countries, as well as the proper and responsible conduct of monetary policy in the main central banks.

However, the international economic landscape seems very complicated.

The clouds gathered over the global economy are not dissipating. Every time we updated our growth projections over the past year, the data were down. We now estimate that, after 2.9% in 2019, the world economy should grow at a similar rate during 2020 and 2021. Eighteen months ago, we forecast growth of close to 4%. A year ago, we projected growth close to 3.5% for 2019 and 2020. Today we are below 3%.

International trade in goods and services, which was expanding at a rate of over 5% in 2017, is now barely able to grow by a few tenths of a percentage point. Global investment flows are also on the same downward trend, going from average annual growth rates of 5% in G20 economies (excluding China) in early 2018, to just 1% in the first half of 2019. Manufacturing orders are contracting and services are starting to follow suit.

And this is not a cyclical issue. This is a slowdown that could have been avoided with the right policies, and that can still be reversed, at least partially.

At present, the largest impediment to economic recovery is uncertainty about public policy. Nearly 60% of companies globally report that one of their main concerns is economic uncertainty; this is twice as many as before trade disputes started escalating. As you are very well aware, companies cannot plan investments or expand into new markets if they cannot anticipate which rules will apply tomorrow. And, of course, lower investment means less economic activity and fewer jobs created in the future.

And this is not our worst-case scenario. There is a risk that trade conflicts may spread further, from the United States and China to Europe and other markets, further entrenching uncertainty and leading to a long-lasting retreat in global supply chains. The issue of tariffs for European cars would be especially serious. Naturally, we all want to see an agreement between China and the United States, even if it is only a “first” phase.

We are also seeing other risks. In the financial sector, accumulated vulnerabilities could turn another economic shock into a crisis. Half of corporate bonds (about 500 billion dollars a year) are being issued just one notch above "non-investment grade". Accordingly, they are exposed to downgrades and fire sales if the economic situation deteriorates again.

What worries us most, however, is that unless politicians take bolder action very soon, we could be set to enter a new era of prolonged stagnation.

The current slowdown is happening on top of a structural decline in productivity growth. Disruptions to trade and and falling cross-border investments damage prospects for enhancing productivity, innovation and living standards in the medium term, while the costs of delaying policy responses to structural challenges – ageing, climate change, the digital transformation – are adding up.

It is not too late, however, to turn the tide. At the OECD, we are convinced that fiscal policy can and should play a very important role as a necessary complement to low interest rates. This does not mean reckless spending, but rather taking advantage of the low-rate environment to lay stronger foundations for tomorrow’s growth. Well-designed public investment can unlock much-needed private sector investment, especially in the sectors driving future growth: infrastructure, energy transition and digital transformation.

How do we see Mexico’s position in this complicated context?

The OECD acknowledges and welcomes the fact that the Government of Mexico has continued to implement a sound macroeconomic policy, with a prudent fiscal policy, focused on maintaining public debt at a constant level. This has helped retain the markets’ confidence. Monetary policy has remained responsibly restrictive, helping to keep inflation expectations anchored. The flexibility of the exchange rate acts as a line of defence against unexpected shocks, thus helping the economy to adapt without turbulence.

The recent 20% increase in the minimum wage is another positive factor. In addition, social spending, which is among the lowest in the OECD, has begun to rise. We also believe that the strategy of redirecting spending towards infrastructure modernisation in the southeast of Mexico could have a positive impact on social inclusion and reducing inequalities.

Unfortunately, despite these achievements, the Mexican economy has been losing its strong momentum. After growth of 2% in 2018, there was almost no growth in 2019 (0.2% if anything), as a result of both internal and external uncertainty, restrictive monetary conditions, and slow budget implementation, typical of a first year of government. The OECD forecasts a slight improvement for 2020 and 2021, when GDP growth should rise to around 1.2% and 1.6% respectively.

While this growth would be welcome, it would definitely not be enough for Mexico.

To move Mexico forward, reforms are needed to generate more inclusive and sustainable growth. For the OECD, it is important to advance along five major lines:

1. First and foremost, inclusion. Mexico has the highest levels of inequality in the OECD and some of the highest in the world. According to OECD data, the average income of the richest 20% is 10.3 times higher than that of the poorest 20%. And according to 2019 data from UNAM's Institute of Social Research, the richest 10% of Mexicans receive 36% of the country's income, while 50% of the population receives 20%. These inequalities have become a drag on growth itself.
   
   - It is therefore crucial to push for: a reform of the tax system in order to enhance its impact on reducing inequalities; a reform aimed at  labour market inclusion, reducing informality and increasing wages; a reform of the pension system, to avoid a generation of elderly poor people; a thorough review of the effectiveness of anti-poverty programmes; and an effort to improve the quality of public expenditure and services.
   
   
2. Productivity. Mexico still has very low productivity levels. This is mainly due to high levels of informality, complex business and labour regulations, credit markets which are still in their infancy, low competition in key sectors, low educational performance, large infrastructure lags, low investment in science and technology, and the poor internationalisation of Mexican companies, in addition to record levels of obesity.
   
   - In order to improve its productivity, Mexico needs a national plan for reducing informality. It is also essential to strengthen the  competition authorities, encourage entrepreneurship and innovation, and engage in thorough educational reform. A national skills and abilities strategy for the digital age must be promoted, the pace of infrastructure and logistics modernisation must be stepped up, the rule of law further strengthened, and a national crusade against obesity launched.
   
   
3. Integrity. Mexico still has the highest corruption perceptions among OECD countries. The level of insecurity, closely linked to the level of corruption and shortcomings in our rule of law, is generating increasing uncertainty among investors.
   
   - Strong action is required in this area. It is crucial to push forward with the full implementation of the National Anti-Corruption System; to introduce the ethics function (providing each public institution with a unit specialised in defining and managing ethical guidelines and dilemmas); to consolidate effective career management in the civil service; to pursue reforms of the disciplinary and oversight systems to make them more effective; and to foster a culture of integrity in private enterprise, civil society, young people and children.
   
   
4. Digitisation. Mexico needs to be better prepared for digital transformation. Even if progress has been made, it still has the lowest level of connectivity in the OECD, with only 64% of the population connected to the Internet. 50% of households do not have an Internet connection. While only 45% of the population over the age of six uses a computer.
   
   - Mexico needs to improve the digital competencies, skills and abilities of its population; to further strengthen expertise in telecommunications; to continue with the installation of Red Compartida (the shared network); to reduce the digital divide between urban and rural areas; and to facilitate the use of electronic banking. 
   
   
5. Sustainability. Mexico also faces significant environmental challenges. Mexico is the fifth-largest GHG emitter in the OECD. It is one of the OECD countries using the least amount of renewable energy in electricity production (8th lowest) and, despite its efforts, has one of the lowest carbon taxes.
   
   - Our country needs to better plan infrastructure investments so as to link them to a low-emission future; to better align tax and budgetary incentives with climate objectives; to rework the financial system so that long-term climate risks and opportunities are part of  its decision-making process; to rethink development financing, bearing in mind environmental preservation and the fight against climate change; and these are just some examples.

These are five areas in which the OECD considers that major structural reforms are urgently required, either by pursuing the changes launched by previous administrations or by spearheading new transformations.

Ladies and gentlemen,

The dynamism of our economy and the job creation required by our citizens depend on an essential factor that we must boost: confidence. Confidence is the mother of investment and investment is the driver for economic growth, growth that has to be inclusive and sustainable.
The ability to build trust and certainty in Mexico depends on our effectiveness in fighting corruption and insecurity; on the quality of government policies and decisions; on the certainty that we will not change the rules of the game. Confidence in Mexico, and throughout the world, is built on political and economic stability, underpinned by high technical performance, and prime competencies and skills. And, naturally, on a cutting-edge business sector, internationalised and committed to the well-being of society as a business incentive and an engine for long-term development.

I hope that these insights and recommendations will help to gain the confidence that is fundamental for building a better present, and above all, a better future for Mexico. Thank you.

 

 

See also:

OECD work on Economy

OECD work with Mexico