Projections for this year’s growth have been revised downwards after some disappointing figures for the fourth quarter of 2021, which suggest that the economy remains weak and quite possibly stagnant.
In December, the average estimate of the growth of the national production of final goods and services (GDP) for 2022, which resulted from the Monthly Survey of Economic Expectations of the IMEF, stood at levels of 2.9%, but was reduced to 2.7% in January. In recent years, Mexico has grown at rates of around 2% and everything seems to indicate that we will continue to see very low rates. Some analysts consider that growth levels of 2% are insufficient to generate jobs and maintain the level of well-being that our population requires.
The economic activity figures from INEGI show marked contrasts, with some sectors already recovered and others still well below their pre-pandemic levels, also realizing that the rebound from the reopening is over and the economy continues without the expected traction. For 2022, growth will depend on various factors, such as public policy decisions, the evolution of the pandemic and the external environment.
In the external sphere we will have some factors derived from past situations —for example, the United Kingdom with the problems caused by its exit from the European Union and China with the dangers of the real estate bubble, the high debt and inequality— and others as a result of events that will take place this year, such as the midterm elections in the United States and the presidential elections in France, Brazil and Colombia.
The United States is going through very significant challenges, such as curbing inflation not seen in decades or achieving the necessary consensus to approve large social and economic plans. In France, a president who has governed from crisis to crisis, with a party that has lost strength and a fragmented opposition, in a European scenario in which there is a Germany without the leadership of Angela Merkel and with new political leaders. All this in the midst of a pandemic that does not stop and that, as well as showing progress, also records setbacks.
In the internal sphere, the perspectives start from a political environment agitated with the questioning of the INE and other institutions, in addition to the elections for governor in six entities of the country, among other issues; the outcome of the energy reform, the relationship with the United States and, as in the international environment, the consequences of the pandemic, which at the beginning of January showed an increase in the number of infections with the consequent impact on economic activities.
What do the indicators say?
Mexico has not taken advantage of the momentum of the reactivation of the North American economy, where they quickly returned to pre-pandemic growth levels, and it is worrying that the Mexican economy has not reacted in sync with that of our northern neighbors. An issue that causes special concern is related to the high levels of inflation. The forecast for the year 2022 was increased from an estimated 4.0% last December, to 4.3% in January. 50% of the participants in the IMEF Survey chose to increase their estimate; the most optimistic expectation was at levels of 3.8%, while the most pessimistic at an annual rate of 6 percent. We must remember that the inflation corresponding to the year 2021 reached levels of 7.36%, the highest we have suffered in this 21st century.
One consequence of these significant levels of inflation is the decrease in the real purchasing power of wages in general. Under these conditions, saying that wages are growing is an illusion, since people can purchase less quantity or quality of goods and services every day, and family savings are less. An expected effect of the pandemic, due to the decrease in the consumption of goods other than basic necessities, was the increase in savings, however this has not happened as a result of the loss of value of family income that has caused a very important deterioration in the middle class: the pandemic caused almost 6.3 million Mexicans to stop belonging to this segment between 2018 and 2020, according to a study by the National Institute of Statistics and Geography, which means that the gap between wealth and poverty will continue to increase as a consequence of the inflationary effects.
The actions of Banco de México become especially relevant in view of the situation described, with several additional increases to the monetary policy rate foreseeable, by means of which credit conditions in the Mexican economy are determined. Monetary policy should continue with increases in interest rates to avoid a greater overflow of inflation. There is a close relationship between the monetary policy of the Bank of Mexico and the decisions of the US Federal Reserve, for which four increases in its federal funds rate are anticipated during 2022, which would mean that we could have several increases in the reference rate Mexico, considering the high levels of inflation in both economies.
With regard to Banco de México, the clarity with which the members of its Governing Board pronounce themselves is important to avoid confusing the market with decisions that are too surprising. Our central bank has enjoyed credibility and it should remain so during the year 2022. Based on considerations such as the previous ones, the members of the Survey increased in this month the projection of the monetary policy rate of the Bank of Mexico to 6.5%, with respect to of 6.0% estimated in December.
In relation to public finances, various pressures are perceived that will end up producing a slightly more deficit public balance. The expectation of the Survey on this important variable of the performance of public finances increased from last month to the current one from -3.2% to -3.3% of GDP.
A positive aspect that resulted from the Survey is the one that has to do with the creation of jobs; 30% of participants revised their estimate upwards from the previous month’s average. Formal jobs registered with the IMSS are expected to increase by 450,000 jobs, compared to the 422.5 thousand projected last December.
It should be remembered, however, that this variable reflects only part of the total employment in the economy, and Mexico should be creating just over a million jobs each year to accommodate all the young people who join the economically active population.
Regarding the exchange rate, it is expected that it will continue its moderate upward trend, reacting to the decisions of the Federal Reserve in its cycle of interest rate increases and the effects that this will have on international financial markets. The consensus of the economists who participate in the IMEF Survey indicates an exchange rate of 21.60 pesos per dollar. The minimum estimate was 20.10 pesos per dollar and the maximum was 24.00 pesos. As has happened in previous years, it is also foreseeable to have episodes of high volatility in the exchange rate.
For the current account, which measures the transactions of goods and services between Mexico and the rest of the world, a fairly balanced result is anticipated, with the median resulting from the Survey with a deficit of 0.5% of GDP in 2022, and a range which fluctuates between a surplus of 1.0% and a deficit of 1.5 percent.
Unit and Strategies
In this way, the year 2022 looks complicated and full of challenges for Mexico. The environment of economic weakness observed under the aforementioned variables could be complicated if there are moments of volatility in international markets. To this should be added the impacts that the fourth wave of coronavirus infections can generate since, even if new closures in economic activities are not contemplated, the economic impact of people who stop going to work can be significant. Another factor that could have some impact on the national economic and financial panorama is the recent announcement of the sale of Banamex by Citi, even though it seems to respond mainly to the institution’s new global strategy.
In this complicated environment, especially in the face of the challenge posed by inflation and the cycle of rising interest rates, the financial decisions of companies are of greater importance. We live in times of special challenges in which the government, companies, institutions and citizens have a fundamental role to resume the path towards the construction of prosperity, which requires better strategies that lead to reinventing and recomposing ourselves. At the IMEF we understand these challenges and we are ready to contribute to the construction of better companies, institutions and, at the end of the day, a better country.
* Alejandro Hernández Bringas is National President of the IMEF