Alphacast Highlight - Mexico October 2022 Macro Brief
Mexico has grown slowly in recent years, particularly since 2018. The Mexican economy hasd grown 1.2% on average in the last decade, but 0% in the last 5 years. In 2020, the country suffered its worst recession since the Great Depression, with GDP dropping 8.5% YoY - and the recovery was incomplete in 2021, with only 4.8% growth. The economy is expected to continue its recovery very slowly, with expectations in the 1-2% annual range for 2022 and 2023. This is due to the Mexican economy's close ties to US economic performance, a major difference from every other large Latin American country.
Activity
The economy is expected to grow 2% in 2022 and 1.2% in 2023. In August, Mexico's monthly GDP estimate rose 5.7% YoY and 1.4% MoM, surpassing July's figure of 1.7% YoY and -0.7% MoM. Growth was led by Manufacturing Industries (+8.1% YoY), Services (+6.6% YoY), and Retail (+6.2% YoY). Growth in 2022 can be explained as a result of the still-ongoing recovery from the 2020 recession.
Inflation
Headline inflation accelerated in August. Annual inflation was 8.7% YoY in August, higher than July's 8.2% YoY printing. All segments of inflation accelerated, with the more volatile Non-Core prices growing 10.7% YoY (vs previous 9.7% YoY) while Core inflation was just 8.1% YoY, higher than the previous 7.7% YoY. Inflation expectations remained significantly above the 3% ±1% target range in September, with expected price growth being 8.4% for 2022 and 4.8% for 2023.
Monetary Policy
Banxico rate hikes have been aggressive during these past two years, with the policy rate having risen from 4% in July 2021 to 9.3% in the current month. This rapid rise is a response to the current record-high inflation rates Mexico is facing, as well as a complex international financial situation. Even though nominal rates have been high and growing over the past 15 months, they had not surpassed inflation until October 2022.
FX & Markets
The Mexican exchange rate has remained relatively stable throughout 2022, with fluctuations around the 20 MXN/USD range. This followed a very sharp devaluation in February 2020, with the exchange rate increasing from 18.6 pesos to nearly 25 in a matter of days - from which it steadily recovered over the following two years.
However, Mexican equities have performed poorly in 2022, due to declines in private consumption (Private Consumption Index was just 3% above Feb-20 in July, latest available data) and real wages (-2.4% YoY in July, -2.9% YoY in August, and -4.2% YoY in September). The Mexico equity ETF trades below both its two-year average (-4.70%) and pre-pandemic prices (-1.9%).
Fiscal
Mexico had a comparatively small fiscal expansion in 2020 and 2021, with deficits of 2.9% of GDP in 2020 and 2021. The government is currently expected to run a deficit of 3.7% of GDP in 2022 and 3.6% in 2023, due to both an expansion of expenditures but also growth in revenue due to higher incomes in state-owned oil assets. However, uncertainty over future drops in global oil prices, and higher financing costs due to the global monetary tightening cycle will result in uncertainty over the authorities' fiscal projections.
Trade and Balance of Payments
Mexican terms of trade have worsened considerably since the beginning of the pandemic and until August, with export prices growing half as much as import prices (13.1% vs 28.4% respectively), resulting in a drop of 11.7% since February 2020. The multilateral real exchange rate has also suffered, having fallen 3.7% versus February 2020. In consequence, the trade deficit has widened considerably, in particular due to a worsening trade balance in petroleum products.
Similarly, Mexico's Balance of Payments has worsened considerably, with a growing current account deficit (on account of the worsening trade balance) and a small positive financial account result. The current account balance in particular has large deficits in goods trade, services trade, and primary income, and a secondary income account that cannot compensate them.
