The International Monetary Fund (IMF) cut its January growth forecast for the Mexican economy by eight tenths, leaving it at 2 percent.
This update on the GDP expectation for Mexico reflects the impact of a slowing external demand, guided by the less dynamic performance of the United States, the deputy director of the IMF Economic Studies Department, Petya Koeava, told El Economista.
The cut in expectations for Mexico also responds to a domestic economic slowdown that had already been going on since before the conflict between Russia and Ukraine”.
Petya Koeava, deputy director of the IMF’s economic studies department.
After participating in the conference where the Economic Counselor, Pierre Olivier Gourinchas, launched the World Economic Outlook (WEO), and argued that the Mexican economy needs more structural strength, guarantee a consistent source of tax revenue whose resources can be invested in education, health, research and infrastructure.
He argues that by strengthening human capital and infrastructure, productivity multiplies and vulnerability to external shocks is limited.
From his offices in Washington, he showed that Mexico’s real income is lower than that of many other countries with similar development.
This is also reflected in the weakness of the recovery and in the slowdown that Mexico presented since long before the war.
According to Koeava, the tightening of financial conditions and the looming rate hike due to efforts by central banks to ease pressure on inflation will also put a damper on the economy.
Since inflation is eroding real income and slowing down consumption. Hence the importance of tightening conditions by central banks, to try to lessen economic pressure.
He admitted that another factor to consider in cutting the estimate is the health recovery from Covid-19, which seems difficult to quantify.
To put the adjustment in the IMF’s expectation for Mexico into perspective, it suffices to mention that the new forecast for Mexico’s Gross Domestic Product is in line with the average collected by the FocusEconomics consultancy and with the World Bank’s expectation.
Inflation, channel of contagion
The official, who is second in command of the IMF Chief Economist, affirmed that the main contagion channel for Mexico due to the Russian war will be through inflationary pressures.
In the WEO, the IMF argues that the persistence of price pressures can lead to a food crisis, which for low-income economies can be the source of riots and social unrest.
Koeava specified in the interview that previous episodes of social unrest in the world have been accompanied by food insecurity.
It is difficult to predict if an episode of social unrest is approaching in low-income economies and even in advanced ones that are also under pressure from increases in energy prices, he said.
But it is true that a greater risk is being pointed out in economies with fewer resources, since the population with lower incomes usually allocates 40% of its consumption to food and energy. And raising the price of these products does increase the risk of social unrest. This is not the specific case of Mexico or any other country in Latin America, but it is what we found in previous experiences.
Hence the recommendation for central banks to moderate the measures to mitigate the impact in order to try to contain the risk of food insecurity.
rate bull cycle
Petya Koeava noted that the impact of inflation is also putting pressure on advanced economies and the US Federal Reserve is expected to speed up rate hikes.
In this regard, he pointed out that this is an additional risk for several Latin American countries, such as Mexico, which tend to be more sensitive to this type of tightening of financial conditions.
He recognized that higher rates make credit more expensive and make investment and spending decisions difficult, which ends up slowing down the economy.
But the central banks have to react and they are important figures behind the cuts to growth expectations applied by the IMF worldwide.