Mexico’s economy had zero growth in 2019 as service-sector activity slowed and industrial production fell. This year, however, we see a modest recovery with steady inflation and more interest-rate cuts.

Construction and mining were the main culprits of the poor performance but the new government’s delays in public spending and postponed private projects prompted investment to shrink by around 5 per cent. As investment represents about 20 per cent of GDP, it more than offset growth in consumer spending and exports.

Any drop in investment has double the direct impact on real GDP growth. However, we think investment will stop falling in 2020.

Oil production has stabilised too and should now increase gradually while mining output, after declining for 67 consecutive months, has finally risen. The government and the private sector have produced a National Infrastructure Plan to boost investment across several sectors with USD23 billion planned for 2020. Transport, telecom and tourism projects will attract private firms.

Private consumption will remain Mexico’s economic engine in 2020. High-earners delayed big purchases last year – car sales fell 7.6 per cent - but low inflation, rising wages and job prospects, plus lower interest rates, should raise confidence.

The strong US economy has helped exports and the Washington-Beijing tariff dispute means Mexico has replaced China as the largest trade partner of the US. More than 80 per cent of Mexican production goes to the US. The new US-Mexico trade agreement has now been ratified with Canada set to join shortly: that should ensure export remain strong even as US growth slows.

Mexico’s car production is mainly driven by exports and although the trade agreement squeezes that sector, the new certainty and a mild recovery of domestic sales should help the industry.

Inflation ended 2019 at 2.83 per cent, below the central bank’s 3 per cent target, and we expect core inflation to keep falling throughout 2020, even though the minimum wage is to rise 20 per cent, making 39.5 per cent in two years.

The central bank made four quarter-point cuts in interest rates last year and we expect three more in 2020, reducing the rate to 6.5 per cent.

The delays in public spending helped Mexico show a 1 per cent budget surplus that reduced its debt-to-GDP level to around 45 per cent in 2019 and although 2020 looks more fiscally challenging we expect another small surplus.

The main risks to economic growth in 2020 are more policy uncertainty and another year of disappointing investment while the main fiscal risks relate to government revenues: larger-than-planned public spending is more easily curbed.

The government’s GDP growth expectation of 1.5 per cent to 2.5 per cent looks ambitious – we forecast just 1.2 per cent – but it is better than another year of zero growth.

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