Global and Mexico Economic Outlook 2018

 

ITAM Seminar, Remarks by Ángel Gurría, OECD Secretary-General

13 January, 2018 Mexico City, Mexico
(As prepared for delivery)

 

Ladies and Gentlemen,

It is a pleasure to be back at ITAM to discuss with you the economic outlook for 2018. I am grateful to the ITAM Alumni Association, and to the Rector and to Bonito Solis for the invitation.

Let me first offer some brief comments on the international panorama, and then go on to highlight some important indicators for the Mexican economy.

 

The world economy: flying low with the risk of turbulence

The message from the OECD has been very clear since we presented our economic outlook at the end of last November. The performance of the world economy is improving, but it still leaves much to be desired. In effect, the international economy will grow at an average rate of around 3.7% in 2018. This represents an improvement compared to the 3.1% recorded in 2016, and 3.6% in 2017. However, for 2019 we will be back at 3.6%.

It is important to note 6 key factors that will affect growth in 2018:

1. Synchrony. For the first time in a decade, the world's largest economies are growing in synchrony.
   
   
   
2. Insufficiency. We have not recovered the dynamism that prevailed before the crisis: between 1990 and 2007, the average annual growth rate of the world economy was around 4%. Between 2008 and 2019, or 10 years after the crisis, that level of growth has yet to be retrieved.
   
   
   
3. Risks. We are particularly concerned with the accelerating growth of corporate and household debt in emerging economies, as well as in some economies of the OECD: in the event of a new shock to the world economy, the tools for addressing it are scarce, and vulnerability is high.
   
   
   
4. Expectations. The high and growing level of inequality, a decade after the crisis, has left citizens throughout the OECD area with less confidence in government institutions. This has an impact on expectations, on optimism, and on investment decisions.
   
   
   
5. Imbalances. We continue to see significant imbalances in the capacity to take advantage of growth – and in globalisation in general – between the wealthiest and the most vulnerable population deciles. This means that inequalities will increase further during 2018.
   
   
   
6. Carbon intensity. Despite the efforts and the progress made, the Global Carbon Project warns that global emissions could increase yet again, as in 2017, after several years of stabilisation, unless stronger measures are taken to reduce our economies' addiction to carbon.
   
   

To all of the above we must add the fact that weak growth in trade, investment and productivity is having a negative impact on the long-term potential of our economies. Consequently, we continue to recommend that efforts be focused on structural reforms aimed at inclusive and sustainable growth. Many OECD countries have room to combine structural reforms in competition, trade, human capital, the labour market, social protection, digitalisation, and green growth, all of which could boost productivity and wages. The old recipe is still valid: it involves simultaneous use of monetary and fiscal policy measures and structural change, which together can reinforce and consolidate steady, inclusive and sustainable growth.

 

Finally, a few comments on what we might call the "Trump affect".

On one hand – in the short term – there has been a positive impact on the stock market, dating from before approval of the tax reform; and on the other hand, in terms of the philosophy underlying trade and investment, there has been a clear tendency to promote bilateral rather than multilateral agreements and relations, with negative impacts over the medium and long terms.

 

The Mexican economy: strengths and challenges

The Mexican economy is still growing. After achieving 2.4% in 2017, the Mexican economy will continue to grow at rates above 2% in 2018. The same will hold in 2019. Although this is an impressive pace, given the external constraints, it still falls short of what Mexico needs to make a significant cut in poverty and to create the jobs that our young people are demanding.

Our outlook for the Mexican economy in 2018 points to a number of positive or encouraging signals. Let me highlight five of those signals that we consider especially important:

1. Fiscal performance is improving. The process of fiscal consolidation is on track, limiting the growth of debt and keeping financing costs low. The tax reform has boosted non-oil revenues. We welcome the significant changes to the Fiscal Responsibility Act, although the authorities should be more careful in applying the "exceptional circumstances" clause.
   
   
   
2. Monetary policy continues to be independent, responsible and reliable. Although inflation has exceeded its forecast range, the Bank of Mexico has taken appropriate decisions to reduce the inflationary index over the course of 2018, raising interest rates from 3% at the end of 2015 to around 7% at the end of 2017. These high interest rates should continue into 2018 in order to ensure price stability, but at that point monetary policy could be relaxed and could return to supporting growth.
   
   
   
3. Exports are growing. The value of Mexico's total goods exports rose by around 10% between January and October 2017, and manufactured exports were up by around 9%, all of this in a year in which world merchandise trade grew by only 3.6%. It is important to note that the bulk of these exports were made by multinational corporations established in Mexico. The challenge is to link Mexican SMEs into these flows. The share of Mexican SMEs in global value chains is still very low.
   
   
   
4. Foreign direct investment is also growing. Inflows of foreign direct investment to Mexico in the first half of 2017 were up by around 9%, over the same period of 2016, in a year marked by great uncertainty in economic relations with the United States and in which FDI flows to Latin America were expected to decline by 5%.
   
   
   
5. In addition, the reforms are already bearing fruit. The results of the telecommunications reform are impressive: prices for mobile broadband service fell by up to 75%, and the number of subscribers jumped by nearly 50 million between 2012 and 2016. The energy reform has boosted private investment by nearly 80 billion dollars. The labour reform has led to the creation of around 3 million jobs during the present presidential mandate to date. The education reform has made merit and transparency the hallmarks of the education system's management. According to the OECD, full implementation of these structural reforms could add as much as an extra one percentage point to the annual growth rate of the Mexican economy.
   
   
   

These achievements are evidence of significant progress, but Mexico still faces some large-scale challenges. Allow me to highlight the ones we consider especially crucial:

1. Improving productivity. Mexico is experiencing a recovery in the productivity of the energy, financial and telecommunications sectors. However, many other sectors are lagging behind, under the constraints of excessively strict local regulations, weak juridical institutions, deep-rooted informality, lack of human capital, corruption, and inadequate financial development. In fact, Mexico's labour productivity compared to that of the United States fell from 40% in 1991 to 29% in 2016. Of particular concern is the very weak labour productivity of Mexican SMEs: in fact, Mexico has the lowest labour productivity in the OECD among SMEs, and the highest gaps in productivity between SMEs and large companies. Mexican SMEs are not linked into global value chains. To achieve inclusive growth in productivity, Mexico will have to improve the skills of its workforce, move up along the global value chains, cut back on regulatory obstacles, combat informality, and reduce corruption.
   
   
   
2. Achieving inclusive growth and combating poverty. Despite significant progress, Mexico still exhibits high levels of poverty. According to the OECD Economic Outlook for Latin America 2018, 7 of every 10 Mexicans are living in poverty or vulnerability, while the wealthiest 20% of the population earns 10 times as much as the poorest 20%. To reduce these imbalances will require:
   
   
   1. improving even further the redistribution capacity of the tax system. Mexico has made progress with tax reform, but it remains the OECD country where the taxation and transfers systems have the lowest impact on the Gini coefficient.
      
      
   2. raising tax collection levels to support increased social spending. At only 8.4%, Mexico is the OECD country with the lowest social expenditure as a percentage of GDP (in contrast to an average of 21% for OECD countries).
      
      
   3. reducing informality. While the number of informal workers has been cut by several million over the last five years, around 57% of workers are still employed under informal arrangements.
      
      
   4. generating a virtuous circle, in which competitiveness and inclusion go hand-in-hand, and the link between the two is the norm.

3.Improving social programs and combating poverty. Mexico has strengthened its programmes for combating poverty. The Prospera programme is now better tied into education and vocational training services, employment opportunities and banking services, covering around 28 million beneficiaries in 2016. However, high levels of poverty persist and there is much room for improvement: 52% of Mexicans who live below the food poverty line in urban areas, and 40% in rural areas, received no subsidy from SEDESOL (the Social Development Ministry) in 2016. The pension programme for seniors has budgetary limits that make it impossible to meet demand fully (covering only 60% of the population over 65 years of age). There is a need to sharpen the focus, reduce favouritism, and improve the quality of public services and interagency cooperation, and to help beneficiaries make the transition to formal employment. The multitude of social and antipoverty programmes also needs to be reviewed in depth (there are more than 5,000 at the three levels of government) to improve their impact and effectiveness.

4. Above all, Mexico needs to improve its institutional structure, the functioning of the rule of law, the anticorruption agenda and the security agenda in order to build a more dynamic and egalitarian country.

Ladies and Gentlemen,

Mexico is the 11th largest economy in the world (in terms of GDP as measured by the purchasing power parity index), and it is a world leader in the design and implementation of structural reforms. It is among the world's most open economies, with one of the youngest and hardest-working labour forces. Yet the country's economic potential is being held back by internal challenges such as high levels of poverty and inequality, extensive informality, low rates of female participation in the labour market, inadequate school performance, financial exclusion, a fragile rule of law, and high levels of corruption, impunity and crime.

To address these challenges the country will have to move forward vigorously with the reforms already approved, and launch a new round of reforms focused on inclusion and on strengthening the rule of law. Mexico must pursue its reforms. It must continue to strengthen them, basing them on best practices, and even reforming the reforms as necessary. This is the only way to make progress.

To this end, the OECD has prepared a document assessing recent policy reforms. We delivered that report to the President when he was at the OECD in December, and we are now distributing it to the line ministers. I invite you to consult it online. In March we will be delivering a new version of "Getting It Right", with our recommendations for enriching debate among candidates and helping them formulate their government programmes. You can count on the OECD to design, develop and implement better policies for better lives.

Thank you very much.