By John Lavelle
As the world emerges from 2021 and enters 2022, many questions will arise about the coming year for individuals, countries, and the world. Will Covid finally dissipate, will Obrador’s policies be effective and sound, and will Mexico’s economy and industry finally rebound? These questions are three of many that are dominating the geopolitics of Mexico today. In the Americas, the central concern for many of its citizens is how the economy will rebound after a highly unstable year. In no place is the question and its answer so uncertain and eminent than Mexico. So, what will 2022 have in store for the Mexican economy?
To predict the future, it is often best to look in the past. 2021 was a disappointing year for the Mexican economy. On the surface, the 5.9% GDP growth rate last year is impressive, especially when the United States’ growth rate was 6.0% and much of the rest of the Americas were far behind. However, a closer look at the data reveals some alarming trends. First, Mexico still has not reached its pre-COVID GDP level, as 2020 saw its economy shrink by 8.4%. Although Mexico had fewer cases per capita than most countries, its economy that centered around manufacturing, tourism, and agriculture were uniquely hit by the virus. Many experts believed that their economy would have a greater rebound in 2021, and it seemed as if it was going to completely recovered after the first two quarters. However, the Mexican economy contracted by 0.4% in Q3 and by 0.2% in December using year-to-date. Since these two quarters saw an economic reduction, Mexico is in a recession, albeit nowhere close to the Great Recession. This contraction was fueled by a worsening service economy, as Mexico saw less tourism and less profit from the top companies in the sector.
Even more concerning was inflation, which was 7.36%. The Central Bank’s target was 4%. This was the highest in twenty years and is worsened by uniquely high labor costs as well. Although this number is not so high when compared to other American countries, it is still an alarming figure. Most of the price rises were found in air travel and food products, which further damaged the economy and the welfare of the populace. In order to combat the inflation, the central bank has raised the nominal interest rates to 5.50%, which has slowed investment and spending.
On the international political stage, Mexico also had a poor performance. From 2020 to 2021, net exports decreased from over 1 billion pesos to -700 million pesos. External investments also declined by 23% to $18.4 billion over the same time period. Although the Mexican external debt dropped during the first two quarters of 2021, the year-to-date debt was higher by over 0.5%. One of many consequences of the rising debt was a higher debt to GDP ratio.
Mexico enters 2022 with a recession, high inflation, and rising COVID cases from the Omicron variant. From these data, it seems as if Mexico will have a difficult 2022; however, there are some positives. For one, Mexico is still one of the strongest and best economies in the Americas. Industries such as fintech, e-commerce, and manufacturing have been rapidly expanding over the past five years, with each industry being in the top twenty worldwide. With Covid expected to die down with less extreme variants, tourism and consumer spending will most likely rebound as well.
So how should the Mexican economy be viewed in 2022? Unfortunately, it is impossible to predict the future, and the economy’s performance will rely on many factors and events. The central questions are ‘will Covid finally desist,’ ‘will U.S.-Mexican relations improve,’ and ‘how will the supply chain function?’ In spite of all the negatives, Mexico should have a cautiously optimistic outlook for 2022.
This prediction is viewed as appropriate amongst most economists and experts as their predictions see Mexico’s GDP rise by 1.5% to 3.0%. The majority of this growth, as stated previously, will most likely be from a rise in tourism and manufacturing. Although growth is always good, these figures still lag behind many other countries in the Americas, such as Argentina, the United States, and Brazil. The reason why Mexico’s GDP growth rate is so marginal is due to President Andrés Obrador’s nationalist economic policies, mainly in energy. Since his election in 2018, Obrador has tried to nationalize the sector by creating public refineries and trying to pass legislation to give total control of the electrical market to the Federal Electricity Commission, a state-owned company. The push for state control in the sector has concerned investors and environmentalists, as both have seen when happened when Venezuela nationalized their energy sector—more fossil fuels were produced and energy would be more expensive for the people. Moreover, Obrador has tried to disband two independent energy regulators, which might make the sector more unclean and susceptible to corruption. These actions have also caused rifts with Canada and the US, as it might violate the USMCA trade agreement and goes against their ‘greener’ energy policies. The actions taken by Canada and the United States if Obrador’s legislation passes are unknown in scope and scale, but will undoubtedly have negative repercussions for the Mexican economy.
The Mexican economy, similar to rest of those in the Americas, is facing an uncertain 2022. After a poor and disappointing performance in 2020 and 2021 respectively, Mexico is hoping for a major rebound in the coming months and years. As Covid continues to diminish in its severity, the travel and manufacturing sectors, the backbone of the economy, should grow rapidly. However, the recession in 2021 combined with Obrador’s controversial energy policies are a major cause for concern and will only hurt the economy, at least in the short term. The Mexican economy should grow in 2022, but not as much when compared to other North and South American nations and to previous expectations. It is important to remember that anything can happen in the uncertain new year, either to the advantage or disadvantage of the Mexican nation and economy.
The Views expressed in this article are the author’s own, and may not reflect the opinions of The St Andrews Economist.
Photo by Jorge Aguilar on Unsplash
One Comment Add yours
excellent article that affords timely and pertinent observations of Mexico’s financial future