Inflation, not policy, should top concerns over Mexico's GDP in 2022

Mexico’s economy kicked off 2022 with growth in a lull, while headline and core inflation ended the year at annual rates of 7.36% and 5.94%, respectively, the highest levels since 2000 for both metrics.

Meanwhile, concerns are running high over proposed constitutional reforms to the electric power sector, with debate on the initiative at the top of the Mexican President Andrés Manuel López Obrador's (AMLO) legislative agenda and congressional panels running near daily through mid-February. 

If passed, the cancellation of power generation and sales contracts and revamping of the regulatory framework to give state-owned utility CFE sweeping control over the market could undermine GDP.

With all of this in mind, BNamericas spoke with Alejandro Cervantes Llamas, head of economic regional analysis at Grupo Financiero Banorte, to gain some clarity on the outlook for growth and monetary policy in 2022.

BNamericas: While Mexico’s finance ministry’s official forecast for 2022 GDP growth stands at 4.1%, Citibanamex’s January 5 survey of bank analysts produced an average expectation of 2.8%, and Mexican finance executive association IMEF earlier this week argued for its own projection of 2.7%, but others are predicting lower growth, such as Bank of America (1.5%) and Capital Economics 2.0%, citing underlying weakness in the domestic recovery. Where does Banorte stand on 2022 growth? 

Cervantes: Our current forecast is 3%, we're making a downward revision to our forecast, but the revision will be a marginal one.

We're still very positive about Mexico’s economic growth outlook for this year. Other economists like [Bank of America head of Canada and Mexico economics] Carlos Capistran have said that maybe Mexico is entering a recession. We don't believe that. 

BNamericas: What about statistics agency Inegi’s “nowcast”, the IOEA, for November and December, which Banorte’s own team suggested earlier this week pointed to 2021 ending with only 4.7% growth, versus the bank’s estimate of 5.7%.

Cervantes: The IOEA ... actually only gives you maybe a signal about where economic growth is heading. 

In Banorte, we also have a nowcast and our preliminary numbers for December and January look a lot more positive than Inegi’s. 

The reality is that economic growth slowed in the fourth quarter of last year. We're going to make a downward revision to our economic growth forecast for 2021 and, consequently, we're going to revise our economic growth forecast for this year. But the revision is only because of the inertial economic growth.

This inertial growth or spillover effect is going to be lower than we originally expected, but still economic growth in the US will tend to be higher than we anticipated the last time we made our economic forecast for 2022.

BNamericas: What’s driving growth going forward?

Cervantes: External demand for Mexican goods is going to remain strong this year, which is a positive thing. I think also domestic demand here in Mexico is very strong. Consumer spending has maintained a positive economic growth outlook. It continues to remain strong, supported by nominal gains in wages.

BNamericas: What about the electric power reform? Is this just political noise that economists are already forecasting will go away at some point?

Cervantes: Yes, I think it's the view of most economic analysts. It's only noise. I think it won't pass [as it is]. It's going to pass as a very diluted electric reform. So, it won't have a significant impact on Mexico's growth this year and it definitely won't have any impact on Mexico’s potential growth looking ahead. 

BNamericas: Is there any other legislative item this year that could have an impact on the economy this year, or what could be the major concern?

Cervantes: Core inflation continues to trend upwards [so] I think inflation is going to be the main concern for Mexico policymakers this year … not only at the central bank, but also at the finance ministry. 

It's also a global effect …. It’s actually like you're importing inflation from other places. So there’s also a limited space for Banxico to act. But otherwise, I think it's going to be a good year for the Mexican economy.

BNamericas: I know Banorte is calling for a second consecutive 50-basis point hike to 6.00% at the February 10 meeting of the central bank. How do you see inflation impacting the bank's calls this year? Could this hamper the recovery?

Cervantes: Maybe It will force the central bank to have a stricter monetary policy, which will include faster tightening of Mexico’s monetary conditions during this year.

There's some lag between when the central bank hikes the reference rate and when the private banking sector begins to hike lending rates.  So, I wouldn't think it will have a strong impact on Mexico’s private sector, perhaps a marginal impact on economic growth. 

I also include that, if Banxico implements a more strict monetary policy, it won't hinder private investment during this year.

Actually, security figures [to date] are beginning to look more positive. There’s a downward trend in homicides, in kidnappings …. So, that could also foster higher economic growth than most economists are considering for this year.