Grim 2022 for Mexico’s economy as it disengages from the US

Mexico’s economy is likely to face a difficult year in 2022, as the boost it receives from US growth is being outstripped by the impact of strict policies and uncertainty surrounding the government’s agenda.

Bank of America Corp. cut its growth forecast from 2.5% to 1.5%, analysts led by Mexico and Canada chief economist Carlos Capistrán wrote in a note Tuesday.

He later said in a video conference that Mexico’s production figures now likely won’t reach pre-pandemic levels until next year.

“Mexico is potentially in a low growth regimeCapistran wrote. Weak activity data shows that “the recovery from the initial phase of the pandemic is over and that activity in Mexico is falling again ”.

Latin America’s second-largest economy contracted in the third quarter of 2021, and a poor start to the last quarter of the year suggests that the contraction was not entirely due to extraordinary factors such as the peak of the delta variant of COVID-19 Capistran wrote. The bank also lowered its 2021 growth estimate from 5.8% to 5.2%.

Throughout the pandemic, the country has been fueled by strong demand from the United States, which helped businesses quickly reopen and expand in the country’s manufacturing heartland – its northern border.

However, Mexico now “seems to be disengaging from US growth”Capistrán wrote, pointing out that the trend could be explained by the contrast between heavy spending and lax monetary policy in the United States compared to the austerity of President Andrés Manuel López Obrador and the eternal restrictive stance of the Bank of Mexico.

External financing has also been drying up, because the “state-centered agendaThe president’s “has weakened investor appetite,” Olga Yangol of Credit Agricole CIB wrote in a note on Tuesday. “López Obrador has shown a tendency to centralize decision-making, which has led to institutional wear and tear and an inefficient functioning of the Government”.

AMLO has further spooked investors with laws that tend toward statism, such as an electricity reform bill that aims to increase the market share of the state-owned utility.

“The president is carrying out, as he has declared, the fourth transformation of Mexico, and every transformation process implies change and, therefore, uncertainty”, Capistran wrote. “The high level of uncertainty is likely to be one of the reasons why investment is very low.”

One of the best growth opportunities in Mexico this year is called “nearshoring“- An initiative to persuade companies that are moving away from China, or want simpler supply chains, to establish facilities in Mexico, both analysts said.

However, neither man was particularly optimistic. Yangol noted that “Government policy centered on the state runs the risk of undermining the opportunity“While Capistrán wrote that this year’s growth is unlikely to change.”in a significative way”.

Low growth and the untying of the United States is likely to affect the peso, which could weaken from the current 20.4 per dollar to 22 by year-end, Capistrán said on the video conference.