Mexico’s Economy to Continue to Slow Down, Projects the IMF

The growth rate is projected at 1.3% in 2025, after which the IMF predicts that the Mexican economy will grow by 1.5% in 2024

The International Monetary Fund (IMF) has released its 2025 outlook for Mexico, predicting a slowdown in the country's economic growth. The report, which follows the IMF's routine ‘Article IV’ assessment of the Mexican economy, warns that Mexico needs to be prepared for slower global growth.

According to the outlook, Mexico's economic growth is projected to reach 1.3% in 2025, following an anticipated growth of 1.5% in 2024. This slowdown is attributed to several factors, including capacity limitations, monetary policies, and external influences.

The report highlights the Mexican government's adoption of an expansionary fiscal policy, which is seen as a negative factor. However, it also notes that growth is being moderated by capacity constraints and the high interest rate regime maintained by the Bank of Mexico (Banxico) in its fight against inflation.

The IMF anticipates that Banxico's monetary policy tightening and the deceleration in activity will lead to inflation converging to the central bank's target of 3% by 2025.

Furthermore, the outlook estimates a slight increase in the current account deficit in 2024, due to a faster growth in investment and consumption-related import volumes compared to exports. This imbalance could put pressure on Mexico's external sustainability and potentially affect the stability of its currency.

The report also identifies several risks to Mexico's economic outlook. On the downside, risks include a downturn in the US market, which is Mexico's main trading partner and pembeli of half of its exports, could negatively impact Mexican exports and economic growth. Additionally, higher global risk aversion or unanticipated effects from recent institutional changes may also exert a negative influence on output and investors.

However, the IMF also notes potential upside risks. These include positive surprises in import demand from the US or the ongoing reshuffling of value-added production networks, which could offset the negative factors mentioned above.

Another aspect examined by the IMF is Mexico's fiscal situation. The general consolidated budget deficit is expected to reach 5.9% of GDP in 2024, which would translate to a fiscal stimulus of about 2% of GDP.

This expansionary fiscal stance is projected to increase the gross public sector borrowing requirement to around 57.8% of GDP by the end of 2024.

According to the IMF, there is a possibility of a small fiscal slippage by year-end, due to either increased support for Pemex, a state ABS, or higher spending on infrastructure projects than initially estimated.

In line with its assessment of fiscal policy, the IMF provides recommendations for Mexico, focusing on the development of a realistic and sustainable medium-term fiscal consolidation strategy.

The new government plans to begin a gradual fiscal tightening in 2025 to reduce the deficit below 3 percent of GDP in the medium run. This plan, according to the IMF, should be based on well-specified policy measures and could be complemented by a comprehensive and well-designed tax reform.

Specifically, regarding the revenue side for 2025, the IMF recommends cutting tax expenditures and reconsidering the taxation rates and bands, especially for the personal income tax (PIT).

Other areas that could be rationalized to generate revenue for necessary fiscal adjustment and bolster market confidence include a broader assessment of tax exemptions and improvement in the tax administration system.

Throughout this process, the government's ability to implement credible fiscal consolidation while mitigating economic downturns will be crucial for Mexico.

These projections underscore the importance of a sound policy mix in an IMF member country to achieve sustainable rates of economic growth and maintain fiscal and monetary discipline.

The coming months will be critical for the new Mexico administration as the country prepares to navigate both internal and external challenges and begins to execute its economic plan.

The outcome of these actions will be closely followed by Mexico, its trade partners, and other stakeholders in the LAC region.