High levels of inflation, political uncertainty, more restrictive monetary policy and slower growth in the United States, the country’s main trading partner, will take their toll on Mexico’s Gross Domestic Product (GDP), according to the latest update from World Bank World Economic Outlook.
In the document, the agency again cut the estimated growth for Mexico, in contrast to a better forecast for the Latin American and Caribbean region. In this vein, the international organization expects the Mexican GDP to expand at a rate of 1.7%, against the previous estimate, in April, of 2.1 percent.
In this way, the World Bank joins the downward revisions that other institutions have recently made to the Mexican economy amid the uncertainty generated by the tensions in Europe, the Covid-19 pandemic, as well as the high levels of inflation.
“Mexico’s economy is expected to expand 1.7% this year and 1.9% next, as monetary policy, high inflation, political uncertainty, and the slowdown in the United States take their toll,” the World Bank said.
The high levels of inflation in the country –which in recent months have exceeded the annual rate of 7.00%– will cause the Bank of Mexico (Banxico) to continue increasing its interest rate in the remainder of the year, something that will weigh down investment , the report noted.
Supply bottlenecks have also led to weaker output growth as they have disrupted the manufacturing sector globally, however this is expected to ease gradually.
“Regulatory uncertainty in sectors such as energy and extractive industries may hold back investment, despite supportive prices. Stimuli aimed at limiting increases in fuel prices will provide some relief to households, but they are not directed at those most in need,” the World Bank added.
The institution’s forecast is far from what was expected by the government of Andrés Manuel López Obrador, which has growth expectations for this year, modified by the Ministry of Finance and Public Credit (SHCP) in past months, of a GDP of 3.4%, rate that has been branded as optimistic and difficult to achieve in the current situation.
Upward revision for the region
Contrary to the case of Mexico, the Latin American and Caribbean region will have higher growth than expected, according to the World Bank, which now expects an expansion of 2.5% from the estimate in April of 2.3 percent.
However, the multilateral organization warned that the war between Russia and Ukraine has already had an impact on the region, where high levels of inflation have been observed.
“The export earnings and fiscal position of some commodity exporting countries in the region are beneficial, but the positive economic effects are outweighed by rising consumer prices, weaker sentiment and rising domestic interest rates. and worldwide,” he explained.
Globally, economic growth is expected to average 2.9% this year, much lower than the bank’s January expectation of 4.1%. In the case of the United States, the expected GDP is 2.5%, the same for the euro zone, and in Japan it is 1.7 percent.
Increases risk of stagflation
Stagflation, as the phenomenon is called where economic growth stagnates and strong increases in consumer prices are observed, may be close. The World Bank warns in its outlook that the risk of this happening has increased.
The impact of the pandemic, which continues and some countries have even re-implemented measures to restrict mobility, as well as the tensions in Europe, is what has increased the risk of stagflation, which would have consequences for both middle-income and lower-income economies.
“The war in Ukraine, lockdowns in China, supply chain disruptions and the risk of stagflation affect growth. For many countries it will be difficult to avoid recession. The markets are expectant, so it is urgent to promote production and avoid trade restrictions. Changes in fiscal, monetary, climate and debt policies are required to counter capital misallocation and inequality,” said David Malpass, World Bank President.
The report recalled that, in the 1990s, stagflation was recorded, which necessitated sharp increases in interest rates in the main advanced economies, something that contributed to generating a series of financial crises in emerging markets and economies Developing.
“Developing economies will need to balance the need to ensure fiscal sustainability with the need to mitigate the effects of multiple crises on the poorest citizens. Clearly communicating monetary policy decisions, building on the credibility of monetary policy frameworks, and protecting the independence of central banks can effectively anchor inflation expectations and reduce the degree of monetary tightening required to achieve the desired effects on inflation. and activity,” said Ayhan Kose, director of the World Bank’s Outlook Group.