Friday, December 2, 2022

The OECD increases Mexico’s growth by four tenths in 2022, up to 2.5%

The Organization for Economic Cooperation and Development (OECD) raised this Tuesday the growth forecast for the Mexican economy in 2022 to 2.5%, four tenths more than its previous forecast for the month of September.

In a new report published today, the OECD also increases its growth forecast for 2023, which stands at 1.6% (one tenth more), while for 2024 it ventures that the Mexican economy will grow 2.1%.

The multilateral organization warns that consumption will be supported by the gradual improvement in the labor market, but attenuated by high inflation.

Meanwhile, he estimated that exports will benefit from high integration into global value chains, although “their dynamism will be mitigated by the slowdown in the United States,” particularly in the electronics and automotive sectors.

In this sense, the OECD explained that even with the solid growth of the first three quarters of 2022, the high-frequency indicators show a decrease in activity in some sectors.

“Mining and construction production contracted recently, although auto production remains resilient, thanks to the easing of supply restrictions,” the report reads.

In addition, he considered that external demand is maintained, although he projected that it will decrease as growth in the United States weakens, as expected for 2023.

However, he noted that inflationary pressures remain high and widespread. “Annual headline and subjacent inflation stood at 8.4% in October. Medium-term inflation expectations have risen,” she warned.

Anti-inflationary fuel plan reduces inflation

The OECD also recognized that the anti-inflationary plan in Mexico has helped alleviate the high cost of energy, as well as inflation, with reductions of between 2 and 4 percentage points.

In this sense, it also estimated that the budgetary cost associated with this mechanism for stabilizing the retail price of fuel will be 1.4% of Mexican GDP in 2022.

According to data from the Ministry of Finance and Public Credit, the Mexican Government has stopped collecting up to 82% taxes on fuels that are distributed in Mexico due to this subsidy program, which until last September totaled 307,791 million pesos in fiscal stimuli. .

Monetary policy must remain restrictive

For its part, the OECD estimated that the interest rate, determined by the Bank of Mexico, will stabilize up to 3.3%, close to the target rate of the Mexican central bank of 3%, until 2024.

For this reason, he projected that monetary policy will reach 10.75% for the first quarter of 2023, “given that the generalized pressures on prices are expected to persist.”

“The policy rate is supposed to increase to 10.75% by the first quarter of 2023 and will remain at that level until early 2024, when it would begin to gradually decrease,” he considered.

However, the OECD did not rule out that inflation could be higher for longer, eroding purchasing power, particularly of vulnerable households, which it said “requires further tightening of monetary policy.”

“Episodes of financial volatility can trigger greater risk aversion, reduce net financial inflows and increase financing costs,” he considered.

Productivity, key priority

In turn, the OECD recommended that Mexico reduce the regulatory cost of formalizing a business, as well as expanding the tax bases to respond to the growing needs for spending on education, health and infrastructure.

In addition, he noted that this would help “to safeguard the commitment to debt sustainability and boost productivity and growth.”

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