After falling 9 per cent last year we expect Mexico’s GDP to grow 3 per cent in 2021 but only 2 per cent next year. And with different recovery paces within the economy, it could take several years before overall economic activity recovers to pre-COVID-19 levels.

Industrial production - around 30 per cent of GDP - should continue to lead the recovery because demand from the US will support manufacturing-related activities. Nonetheless, industrial sectors dependent on local factors, including construction and oil production, may face a more complicated environment.

A major concern for growth is investment, which has declined consistently since 2018 and is expected to improve only very gradually.

Net exports will play a larger role in GDP in 2021. Many manufactured exports include imported inputs and the combined trade comprises 80 per cent of GDP. But because the economic recovery is export-led while consumer and capital imports recover slowly, there should be another significant trade surplus in 2021.

The US is Mexico's most important trade partner by volume. Mainland China is the main competitor for manufactured goods but the tariffs dispute with the US has allowed Mexico to overtake its rival - for the moment, at least.

The outlook for services, which represent 65 per cent of GDP, is complicated by the effects from the pandemic and the lack of a robust fiscal-stimulus programme. Another round of partial shutdowns was announced in December.

The government’s fiscal stimulus in response to coronavirus has been limited - about 1.2 per cent of GDP. So despite steep activity decline in 2020, we expect a balanced budget this year followed by 1 per cent surpluses in subsequent years. Stable public finances will remain an anchor for the government, in our view, allowing a gradual reduction of debt-to-GDP, which should have a have a positive impact on the currency and long-term interest rates.

The vaccination programme is still a big unknown though. We expect roll-out to prove slower than planned, so normalisation of economic activity could take more time to materialise.

Inflation, consistently above 4 per cent until last year, ended last year at 3.15 per cent and the new shutdowns could lead to further easing of prices. The rate should stay within the central bank’s target range in 2021. The bank’s policy rate started 2021 at 4.25 per cent but we expect a fall to 3.75 per cent by March - with another quarter-point cut if inflation stays around 3.5 per cent.

Mexican elections in June see voting for all 500 Congress seats. The president’s party currently has a majority and the election will determine the political conditions for the second-half of the administration’s term and whether more ambitious reforms, requiring more profound changes, will be possible.

There have been no signs yet of any significant deviation from the existing US-Mexico bilateral relationship since the US presidential election, but softer immigration policies could buoy wage remittances to Mexico and less-protectionist measures and additional fiscal stimulus by Washington could benefit trade with the US. However, tougher environmental policies could impact Mexico’s oil and gas industry.

First published 22 January 2021.

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