Economic forecast for Mexico

05.12.2024

The economy is projected to expand moderately, growing by 1.4% in 2024, 1.2% in 2025 and 1.6% in 2026. This steady growth reflects easing inflationary pressures, which will help support consumption, and a gradual decline in interest rates that will stimulate investment, despite fiscal consolidation efforts in 2025. Export growth is expected to remain strong, driven by favourable economic conditions in the United States. Inflation will keep edging down to 3.3% in 2025 and 3% in 2026.

To ensure that inflation continues to decrease towards target, the central bank should continue its prudent and gradual easing cycle. Implementing a medium-term fiscal plan could help reduce the deficit gradually, creating room for investments that boost productivity, such as education and infrastructure. Additionally, a comprehensive early childhood education and care system could foster the labour market participation of women and expanding dual vocational programmes could boost the availability of technical skills and access to formal jobs.

Domestic demand has weakened.

Short-term indicators suggest that the domestic demand weakness, which began at the end of 2023, persists. Slowing private consumption in both goods and services is linked to lower job creation in the industrial sector. Investment has also softened, with public investment stagnating after the completion of major infrastructure projects in the South and private investment weakening as well. Recent judicial reforms have created uncertainties and domestic and international investors’ confidence has deteriorated. Exports have remained resilient, supported by robust demand for durable goods from the United States. Headline inflation increased to 4.8% (year-on-year) in October, reflecting volatility in energy and agricultural prices. Core inflation fell to 3.8% in October, though persistent inflationary pressures in the services sector, at 5%, suggests price stabilisation remains uneven across the economy. The labour market remains strong, despite an uptick in unemployment to 2.7% in September, still near historically low levels. Formal job creation has recently lost dynamism, particularly in the industrial sector. The informality rate is at 54.2%, 3.4 percentage points below its historical average. While data on job vacancies in Mexico is unavailable, recent analyses indicate a tight labour market, with firms struggling to find and retain workers, especially ones with technical skills. Female labour force participation has increased recently, but remains significantly lower than in regional peers and other OECD countries. Domestic and caregiving responsibilities disproportionately fall on Mexican women, limiting their opportunities to complete education or fully participate in the labour market.

Growth will remain moderate.

The economy is projected to expand by 1.2% in 2025 and by 1.6% in 2026. Private consumption will be supported by low unemployment and declining inflation. Private investment will gradually benefit from lower interest rates, but public investment will remain subdued to reduce the fiscal deficit. Exports will continue to benefit from deep integration in manufacturing value chains. Headline and core inflation will continue to gradually slow and return below the 3% target by the third quarter of 2025. However, the inflation outlook remains uncertain. A risk is that inflation may be more persistent than anticipated, particularly in services. Greater global risk aversion and unforeseen effects from recent institutional reforms in Mexico could weigh on investment and growth. On the upside, nearshoring could boost investment and exports by more than projected.

Source: European Commission. European economic forecast, december 2024.