In its year 2025 outlook for Mexico, the IMF says the country’s economy will continue to slow down. The growth rate is projected at 1.3% in 2025, after which the IMF predicts that the Mexican economy will grow by 1.5% in 2024. This forecast puts forward a most unpleasant picture of continued economic adversity for the second-largest economy in Latin America.
The analysis follows the IMF’s routine ‘Article IV’ assessment of the Mexican economy and warns that Mexico needs to be prepared for slower global growth. As discussed in the above report, there are limber points which caused the low growth expectations such as capacity limitations, monetary policies and external factors.
With regard to fiscal policy, the IMF identified the negative issue of the Mexican government adopting an expansionary fiscal policy. However, the growth in the Mexican economy is moderating because of sharply constraining factors of capacity impediment and the continuing high interest rate regime that has been put in place by the Bank of Mexico (Banxico) in its fight against inflation. The IMF believes that further monetary policy tightening and the deceleration in the activity will lead to inflation targeting Banxico at 3% by 2025.
They further estimated that the current account deficit is likely to increase slightly within the year 2024 due to the increase of investment- and consumption-related import volume exceeded export volume. This enhance may put extra pressure issues on Mexico’s external symmetry and even possibly affect its currency stability.
The report by the IMF also on the Mexican economy reveals several risks to its outlook. On the negative side, there are risks associated with contraction in the US market, such as Mexico’s chief trading partner and purchaser of half its exports potentially harming Mexican exports and economic growth. However, higher global risk aversion or unanticipated impacts from the recent institutional changes may exert a negative impact on output and investors.
However, it also includes upside risks, according to the IMF. There may be positive surprises on the import demand side through the US or continuous reallocation of value-added production networks that can counterbalance the above-mentioned detrimental factors.
Another of the aspects examined by the IMF is the fiscal situation in Mexico. The general consolidated budget deficit is expected to be equal to 5.9% of GDP in 2024, which will mean the equivalent of a fiscal stimulus of about 2% of GDP. This expansionary fiscal mix is projected to take the gross public sector borrowing requirement to around 57.8% of GDP by the end of the year 2024. Policies and outcomes As for the IMF, there is a possibility of a small fiscal slippage by the year-end because of more support for Pemex, a state ABS, or more spending on infrastructure projects than had been estimated.
On the same note as fiscal policy, the IMF has future recommendations for Mexico, focusing on the accrual of a realistic and sustainable medium-term fiscal consolidation strategy. The new government plans to start an essential fiscal tightening in 2025 in order to bring the deficit below 3 percent of GDP in the medium run. According to the IMF, this plan should be based on well-specified policy measures and may be accompanied by a general and well-defined tax reform.
More precisely, the IMF recommends concerning the revenue side for 2025: first, cutting the tax expenditures; second, reconsidering the taxation rates and bands, primarily of the PIT. The same is true for other areas that may need rationalization in order to produce funds for necessary fiscal correction and support market confidence, such as additional assessment of tax exemptions and enhancement of the taxation system.
During this evolution, the government’s capacity to implement credible fiscal consolidation while countering economic contractions will be relevant to Mexico. These projections reinforces the country’s economic conditions and realises the importance a correct policy mix in an IMF member country so as to achieve sustainable rates of economic growth as well as to balance fiscal and monetary discipline.
Several months will be decisive for the new Mexico administration as the country is preparing to meet its internal and external challenges as well as starting to realize its economic plan. Hence the outcomes of these activities will be very important for Mexico and its partners in trade and other interested parties in LAC.
