OECD Economic Outlook, Volume 2023 Issue 2

Mexico

The economy is projected to expand by 2.5% in 2024 and by 2% in 2025, after growing by 3.4% in 2023. Consumption will be supported by a strong labour market. Investment will be backed by public infrastructure projects which are expected to be finalised in 2024 and by the nearshoring of manufacturing activities to Mexico. Export dynamism will be mitigated by milder growth in the United States. Inflation will edge down to 3.9% in 2024 and 3.2% in 2025.

Monetary policy should remain restrictive to ensure that inflation decreases durably towards its target. Targeting social spending increases on low-income households and basing public investment projects on sound cost-benefit analysis would boost public spending efficiency and mitigate inflationary risks. Higher regulatory certainty, including in the energy sector, would help to make the most of the ongoing nearshoring of production processes to Mexico.

Domestic demand is resilient

Short-term indicators show consumption remaining resilient and investment trending up, particularly in non-residential construction, supported by public infrastructure projects in the south, and investment in machinery and equipment related to nearshoring. Mexican industrial parks across the United States border are at full capacity. Export growth and manufacturing production have remained solid, particularly in the automotive sector. Headline inflation has continued to decline, reaching 4.3% year-on-year in October, while core inflation remains stickier, at 5.5%. Inflationary pressures remain particularly high in services.

Mexico: Investment and inflation indicators

1. The shaded area represents the central bank's inflation target range.

2. Private sector inflation expectations for the next 12 months.

Source: INEGI; and Bank of Mexico.

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Mexico: Demand, output and prices

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The labour market is strong, with unemployment low (2.9% in September) and broader measures of unemployment confirming the strength. Real wages have increased, supported by increases in minimum wages, beginning-of-the-year salary reviews and the slowdown in inflation. Informality is hovering around 55%, around 3 percentage points below the historical average. Labour market participation is increasing for women, although it remains significantly lower than in regional peers and other OECD countries. With the broader measure of unemployment close to 20%, there seems to be sufficient labour market resources available to respond to increases in labour market demand derived from the ongoing nearshoring of activities to Mexico.

Monetary policy will need to remain restrictive

To respond to mounting inflationary pressures and anchor inflation expectations, the central bank has gradually increased the policy rate to 11.25%. Headline inflation has continued to soften, but with core inflation proving more persistent and inflation expectations still above target, monetary policy should remain restrictive. The policy rate is assumed to remain at its current level until the second half of 2024, when it would start to be reduced gradually. Fiscal policy continues to prioritise some social programmes, particularly non-contributory pensions, and priority infrastructure projects in the South, which are expected to get a final push towards finalisation in 2024. The budget deficit is expected to increase to 4.9% of GDP in 2024, from 3.3% of GDP in 2023, as budget allocations for social spending, particularly universal non‑contributory pensions, and flagship infrastructure projects in the South significantly increase. The deficit will decrease to 2.1% in 2025. The official measure of public debt is expected to remain broadly stable around 50% of GDP.

Growth will moderate

The economy is projected to expand by 2.5% next year and 2% in 2025. Private consumption will be a key driver, supported by low unemployment and increases in real wages. Private investment will gradually benefit from the relocation of manufacturing activity to Mexico. Exports will suffer from slower growth in major trading partners but will benefit from deep integration in manufacturing value chains and nearshoring. Annual headline and core inflation will continue to slow gradually and are expected to return to the 3% target by the third quarter of 2025. However, the inflation outlook remains very uncertain. Inflation may be more persistent than anticipated, if for example energy or commodity prices rise substantially. Episodes of global financial turmoil may trigger greater risk aversion and increase financing costs and foreign exchange market volatility. On the upside, a swifter reconfiguration of global value chains could boost investment by more than anticipated.

Boosting productivity is a key priority

Broadening the tax base would help to respond to increasing spending needs in education, health, and infrastructure, safeguard the commitment to debt sustainability, and boost productivity and medium‑term growth. Improving access to, and the quality of, early childhood education and care would support female labour force participation, foster growth prospects and reduce inequalities. Reducing the regulatory cost at the state and municipal level of formalising and growing firms, and continuing to improve labour dispute resolution mechanisms, would support stronger formal employment and productivity. Shifting to renewable energy and promoting public urban and inter-urban transport would reduce emissions and the use of fossil fuels.