IMF cuts Mexico growth forecast to 2%, down from 2.8%

The International Monetary Fund (IMF) has cut its 2022 economic growth forecast for Mexico to just 2% from 2.8% in January.

In its April World Economic Outlook report, the IMF also lowered its 2023 forecast for the Mexican economy, predicting that GDP will increase 2.5% next year, a 0.2% decrease compared to its 2.7% prediction three months ago.

Mexico’s GDP slumped over 8% in 2020 due to the pandemic and associated restrictions, but recovered strongly with growth of 5% last year.

Subtitled “War Sets Back the Global Recovery,” the new IMF report said that global economic prospects have worsened significantly since the January World Economic Outlook was published.

“At the time, we had projected the global recovery to strengthen from the second quarter of this year after a short-lived impact of the omicron variant. Since then, the outlook has deteriorated, largely because of Russia’s invasion of Ukraine – causing a tragic humanitarian crisis in Eastern Europe – and the sanctions aimed at pressuring Russia to end hostilities,” the intergovernmental financial institution said.

“This crisis unfolds while the global economy was on a mending path but had not yet fully recovered from the COVID-19 pandemic, with a significant divergence between the economic recoveries of advanced economies and emerging market and developing ones.”

The IMF’s Mexico forecasts for 2022 and 2023 are well below those of the federal Finance Ministry, which updated its predictions at the start of April t0 3.4% for this year and 3.5% for next. President López Obrador has typically been more optimistic than his own government with regard to growth prospects and has routinely dismissed forecasts made by international organizations such as the IMF.

The organization’s April Outlook noted that inflation had surged in many economies even prior to Russia’s invasion of Ukraine “because of soaring commodity prices and pandemic-induced supply-demand imbalances.”

Inflation in Mexico reached a 20-year high of 7.37% in November, while it was 7.29% in the first half of March. The IMF projects that consumer prices will increase 5.9% in Mexico this year and 3.4% in 2023.

It noted that central banks in some emerging markets and developed economies, “such as the US Federal Reserve and those in Latin America,” came under pressure due to inflation before the war in Ukraine, which caused them to bring forward the timing of their monetary policy tightening.

The Bank of México has raised rates at all of its last seven meetings. Its current benchmark rate – 6.5% – is 2.5% higher than it was a year ago.

In a World Economic Outlook sub-section on Latin America and the Caribbean, the IMF said the region is “expected to be more affected by inflation and policy tightening” in the near future.

“Brazil has responded to higher inflation by increasing interest rates 975 basis points over the past year, which will weigh on domestic demand. To a lesser extent, this is also the case in Mexico,” the World Economic Outlook report said.

“The downgrades to the forecasts for the United States and China also weigh on the outlook for trading partners in the region. Overall growth for the region is expected to moderate to 2.5% during 2022–23,” the IMF said.

It cut its 2022 forecast for the United States – Mexico’s largest trading partner – to 3.7% from 4% in January, while the outlook for China was downgraded to 4.4% from 4.8%.

The IMF is projecting worldwide growth of 3.6% in 2022 and 2023, reductions of 0.8% and 0.2%, respectively, compared to January. It predicts Ukraine’s economy will contract 35% this year and that Russia’s GDP will decline 8.5%.

“The severe collapse in Ukraine is a direct result of the invasion, destruction of infrastructure, and exodus of its people. In Russia, the sharp decline reflects the impact of the sanctions with a severing of trade ties, greatly impaired domestic financial intermediation, and loss of confidence,” the fund said.

“The economic effects of the war are spreading far and wide – like seismic waves that emanate from the epicenter of an earthquake – mainly through commodity markets, trade, and financial linkages. … The war adds to the series of supply shocks that have struck the global economy over the course of the pandemic, contributing to more shortages beyond the energy and agricultural sectors. Through closely integrated global supply chains, production disruptions in one country can very quickly cascade globally,” the IMF said.

Mexico News Daily