Economics: January data show growing challenges for the Mexican economy in 2022

MEXICO - Report 31 Jan 2022 by Mauricio González and Francisco González

The economic news published in January provides further evidence that the most immediate hurdles facing the Mexican economy this year include the upsurge in inflation and the extent to which the recovery has been losing steam. Those challenges emerge at a time when public finance continues to weaken and there is a sense of uncertainty that is being further stoked by the lack of visibility as to the terms under which the government’s energy policy is being concretized.

Just this past week the National Consumer Price Index showed that the 12-month rate of consumer inflation accelerated to 7.13% during the first half of January as non core inflation broke into double digits. According to our analysis, any eventual easing of inflation will be gradual, at the same time as the United States and several emerging economies raise interest rates, which should nudge reference rates in Mexico between 100 and 125 basis points higher over the course of 2022.

Economic indicators for the fourth quarter of last year point to a weakening in important aggregate demand components, as well as in production and services indexes. The most recent results not only imply lower growth at the end of 2021, but when analyzing the causes, they also anticipate a weakening of the economy at least during the first half of 2022. Manufacturing production has lost its momentum, mainly due to the contraction in branches related to the automotive sector that face considerable obstacles in accessing inputs, while gross fixed capital formation maintains its downtrend, and consumption is not displaying a clear recovery.

In addition, the industrial sector expanded less than a percentage point in November 2021, a major step down from the roughly 7 percent average expansion year to date. Services have also experienced a relative softening in recent months and remain almost 13% below their 2019 close, a performance gap due primarily to the lack of recovery seen in segments that experienced the direst pandemic-related consequences, leaving them languishing as much as 29% below pre-pandemic levels.

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