Mexican Growth Forecast Revised Up On Q2 Data, Despite Rising Risks

• Fitch increased its 2022 real GDP growth prediction from 1.5% to 2.0% as a result of Mexico's Q2 2022 real GDP growth print exceeding its forecasts. The preliminary Q2 2022 growth numbers of 2.1% y-o-y, exceeded the 1.5% y-o-y prediction.
• Private consumption will continue to be the main source of growth in 2022, although its percentage point contribution will drop to 1.4 from 4.9 in 2021. Retail sales and labour market statistics imply that private consumption remained strong (+7.2%) in Q2 2022 despite rising inflation, which was supported in part by record remittance inflows.
• In Q1, real exports expanded 10.1% y-o-y, outpacing 5.8% growth in imports, and monthly trade data for Q2 suggests export demand from the US remained robust. However, in H2 Fitch forecasts that private consumption in the US will slow as elevated inflation, Fed tightening and weaker sentiment weigh on household purchasing decisions. Combined with an ongoing rebalancing from goods toward services in the US, the demand for Mexico’s goods exports will moderate.
• That said, Fitch revised its 2023 growth forecast from 2.0% to 1.7%, reflecting the Agency's weaker outlook for the US and its view that inflation and interest rates will remain elevated next year. It will also be influenced by trade tensions with the US and Canada, who have requested a dispute settlement mechanism under the USMCA trade deal regarding Mexico’s energy policy. The 2023 growth forecast for the US has been lowered from 1.8% to 1.6%, which will result in weaker demand for Mexican exports and a deceleration in remittance growth.
• Additionally, inflation will come down slowly in 2023, from 7.4% y-o-y at end-2022 to 4.4% at end-2023, averaging 5.7%. This remains well above Banxico’s 3.0% target, and as such the bank will be slow to loosen interest rates, cutting to only 8.50% by the end of the year.

(Source: Fitch Solutions)