GDP growth in 2024 should be better than the average for the past 30 years, boosted by falling inflation and interest rates.
Santander México’s economists consider the prospects for Latin America’s second largest economy.
Mild slowdown but inflation falling
In 2024, Mexico is expected to achieve a growth rate higher than its 30-year average, despite the challenges posed by higher interest rates on investment and consumption at home, and lower growth in the US, its major trading partner.
Headwinds caused by higher interest rates and US issues should be offset by a significant drop in inflation from 4.7% at the end of 2023 to 4% by late 2024, driven by a slowdown in prices of energy, produce and general goods. This represents a huge drop from the 8.7% peak recorded in September 2022.
However, inflation in services has remained stubbornly high at 5.5% over the past year on the back of strong domestic demand and generous wage rises. As the economy cools, this rate should begin to subside.
Scope for central bank to ease monetary policy
Amid a mild economic slowdown and lower inflation, there is room for the central bank to ease monetary policy. Mexico’s benchmark interest rate of 11.25% is one of highest in the country’s history and is almost three times the forecast inflation rate for the next 12 months.
The central bank is expected to review the possibility of lowering the benchmark rate in the first quarter of 2024. Markets will be watching carefully to assess the size and speed of any cuts.
Public finances deficit widens but foreign investment is on the rise
One of the biggest challenges for the new government when it takes the reins in October will be to reduce Mexico’s fiscal deficit, which is currently forecast to widen to 5.5% of GDP because of higher spending on pensions and public works.
We estimate a deficit of no more than 1.5% of GDP in the current account in the external sector, helped by net inflows of foreign direct investment that could exceed the equivalent of 2.5% of GDP.
