Mexican economy faces sluggish 2022 as growth decouples from the United States

(Bloomberg) – The Mexican economy is likely to have a tough year in 2022, as its boost to US growth is overtaken by the blows of strict policies and uncertainty over the government’s program.

Bank of America Corp. lowered its growth forecast from 2.5% to 1.5%, wrote Tuesday in a note from analysts led by chief economist of Mexico and Canada, Carlos Capistran. Speaking on a video conference afterwards, he said Mexico’s production figures are unlikely to reach pre-pandemic levels until next year.

“Mexico is potentially in a low growth regime,” wrote Capistran. Weak activity data shows that “the rebound from the initial phase of the pandemic is over and activity in Mexico is, if at all, on the way down.”

Latin America’s second-largest economy contracted in the third quarter of 2021, and a poor start from October to December near the year suggests that the contraction was not entirely due to one-off factors like the peak of the Delta variant of Covid-19, wrote Capistran. The bank also reduced its growth estimate for 2021 from 5.8% to 5.2%.

The country has been propelled throughout the pandemic by strong demand from the United States, which has helped businesses reopen and rapidly expand into the manufacturing hub on the northern border.

However, Mexico “now appears to be decoupling from US growth,” wrote Capistran. He argues that the trend can be explained by the contrast between massive spending and lax monetary policy in the United States versus the austerity of President Andres Manuel Lopez Obrador and the eternal warmongering of the Bank of Mexico.

Read more: Mexico’s patchy recovery fueled by the United States leaves many regions behind

External funding has also dried up, investor appetite being sapped by the president’s “state-centric agenda”, Olga Yangol of Crédit Agricole CIB wrote in a note on Tuesday. “Lopez Obrador has shown a tendency to centralize decision-making, which has resulted in institutional erosion and inefficient functioning of government. “

He further frightened investors with state legislation such as an electricity reform bill that aims to increase the market share of the state-owned company. “The president is, as he said, carrying out Mexico’s 4th transformation, and all transformation processes involve change and therefore uncertainty,” wrote Capistran. “The high uncertainty is probably one of the reasons the investment is so low.”

One of Mexico’s best growth opportunities this year is near-shoring – a push to persuade companies moving away from China or wanting simpler supply chains to set up facilities in Mexico, the two analysts said. Neither was particularly bullish, however. Yangol noted that “the government’s state-centric politics risked undermining the opportunity,” while Capistran wrote that this year’s growth is unlikely to change “significantly.”

Weak growth and decoupling with the United States are expected to weigh on the peso, which could weaken from 20.4 per current dollar to 22 by the end of the year, Capistran said on the video call.

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