Macroeconomic Risks for 2024

In 2023, the Mexican economy surprisingly defied the growth expectations of leading analysts. The external sector, hand in hand with foreign investment, and a significant increase in the real wage bill were the main drivers of such growth. At the same time, inflation receded due to the upward adjustment of interest rates throughout the year and the peso continued to appreciate as a result of higher manufacturing exports, a record number of remittances, and the recovery of tourism flows. Furthermore, there was a boom in nearshoring investment (the reallocation of Chinese investment to Mexico). Consequently, the economy has probably grown at an annual rate of around 3.5%.

Even though the dynamism of the economy was good in 2023, this year there are risks that could affect growth. Last year the International Monetary Fund (IMF) published article IV for Mexico, which reduces economic expectations: 2.1% for 2024 and 1.5% for 2025. The main factors include the low productivity of the economy—which continues to take toll on the country’s potential growth in the medium term—, a deteriorating education system—demonstrated by the PISA Report—, and the deficient allocation of resources to science and technology—just 0.3% of GDP. These factors are depleting Mexico's productive capacity in the long term.

The slowdown in economic activity in 2024 is related to a decline in US industrial dynamism owing to a more restrictive monetary policy. Although the federal budget estimates a significant increase in public spending for this year, growth will be affected by a less dynamic external sector. The US Manufacturing Purchasing Manager's Index (PMI) continued to contract in December (47.9 points - a reading below 50 points indicates an economic contraction). This effect will increase unemployment in the country.

Inflation rebounded considerably during the first half of December, reaching an annual rate of 4.46% compared with 4.3% in November. Wage increases, without  growth in productivity, put pressure on consumer prices, particularly those related to services (5.4% in the first fortnight of December). Another risk for 2024 is the proposed fiscal deficit, which is estimated to increase from 3.9 to 5.4% of GDP. The IMF anticipates an annual debt level for Mexico of 52.7% in 2023, but it could be even higher in 2024 due to a procyclical economic policy.

Importantly, 2024 is an election year in both the US and Mexico, which will have an impact on the real economy of both countries. Mexico’s increased fiscal deficit has electoral overtones, since there has not been an abrupt economic slowdown that would justify an increase in public spending at the expense of the deterioration of the fiscal balance. The foregoing could harm Bank of Mexico’s monetary policy actions, which would already have contemplated lowering interest rates during the first quarter of 2024.

In this context, monetary policy is expected to be more accommodating in line with the downward trend in inflation, although the rate cut is likely to be lower in Mexico than in the US. The reduction in interest rates will have a favorable effect on the real economy and financial markets, since the restrictive monetary policy has, so far, decreased the growth rate of the global economy. In addition, the start of the cycle of lower interest rates will be welcome for government financing costs.

Nevertheless, in 2024 the economy will continue to expand, albeit at a more moderate pace. The downward trend in inflation will continue, although with growing pressure from the increase in the fiscal deficit. The nearshoring effect will be positive, but its potential growth will be curbed by low levels of productivity related to a poor education level and scant investment in science and technology.

The author is professor of Economy and Finance at EGADE Business School.

Article originally published in Forbes México.