Slow U.S. Recovery Could Limit Growth in Mexico's Economy in Short Term, but Reforms Could Boost Long-Term Prospects

By Navarro, Carlos | SourceMex Economic News & Analysis on Mexico, April 3, 2013 | Go to article overview

Slow U.S. Recovery Could Limit Growth in Mexico's Economy in Short Term, but Reforms Could Boost Long-Term Prospects


Navarro, Carlos, SourceMex Economic News & Analysis on Mexico


When President Enrique Pena Nieto's took office, he immediately entered into an agreement with the opposition parties in Congress to promote deep reforms that would set the foundation for long-term economic growth (SourceMex, Dec. 5, 2012). Some of those reforms have already been approved or are under consideration, including an overhaul of the public-education system (SourceMex, Dec. 12, 2012) and expansion of the telecommunications sector (SourceMex, March 27, 2013). But some of the reforms that matter most, an overhaul of the tax code and significant changes to energy policy (particularly the state-run oil company PEMEX), have yet to be considered.

Without the reforms, Mexico is expected to grow between 3.5% and 4% in each of the next two years, but economists believe the GDP growth rate could be even higher if Pena Nieto and the Mexican Congress are able to push through the energy, tax, and telecommunications reforms. The changes in the telecommunications sector have been approved in the Chamber of Deputies but await debate in the Senate. A major effect of the reforms would be to eliminate many restrictions on domestic and foreign investment, which would bring the capital needed for growth in these sectors. Barbara Kotschswar, an economist at the Washington-based Peterson Institute for International Economics (IIE), said the potential is there for Mexico to surpass Brazil as Latin America's preferred destination for foreign investors.

"[Mexico] is viewed very favorably overseas and has gained a place among the most promising countries," Jonathan Heath, a private consultant in Mexico City, wrote in the Mexico City daily newspaper Reforma.

But Heath notes that optimism is more guarded in Mexico because high expectations have been dashed before. "Our most important growth engine--exports of non-petroleum manufactured products--demonstrated a very sluggish pattern in December and January, while the figures for the auto industry were apathetic in February," said Heath. "Production from the manufacturing sector advanced a mere 0.05% in January relative to the previous month, and annual growth reached a mere 2%."

Others concurred that the weakness in the manufacturing sector would limit growth for the entire year. In its most recent survey of private economists and analysts, the Banco de Mexico (central bank) said the average of projections declined to 3.46%, compared with a previous average of 3.54%.

The projections by the economists surveyed by the central bank coincided with other private forecasts. "We are keeping our growth projection at 3.2% for 2013, which is lower than the 3.9% growth rate reported in 2012," said Sergio Martin Moreno, an economist at HSBC in Mexico.

As a result of the sluggish economy, job growth in Mexico remains slow. The survey showed that businesses remained cautious about hiring new workers in March, with only 7% of survey participants indicating that they hired new employees and another 4% reporting a reduction in their work force. "In general terms, the rate of job creation was moderate and much slower than the previous month," Martin Moreno told the Notimex news agency.

One reason for the weakness in the manufacturing sector is the sluggish demand for Mexican goods in the US market, with Mexico's exports of manufactured goods in February down 1.5% relative to a year ago, the Instituto Nacional de Estadistica y Geografia (INEGI) reported at the end of March.

Decline in remittances hurts Mexican economy

The weak US economy has also affected one of Mexico's top sources of foreign exchange: remittances from expatriates. A recent report from Mexico's central bank, also known as Banxico, said remittances have declined for eight consecutive months. In February, remittances amounted to US $1.59 billion, just short of the projected US$1.71 billion, said the central bank.

But remittances have been falling steadily since July 2012, partly because of weakness in the US construction sector, which employs many Mexican expatriates. …

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