Mexico Economic Review and Outlook

Executive Summary

Over the past few years Mexico’s economy has underperformed, with economic activity and annual growth weaker than expected, even while the U.S. economy has accelerated. This has been a deviation from historical trends as Mexico is typically a beneficiary of a stronger U.S. economy. In this article, we look to examine why the two economies have been on divergent growth trajectories and how the energy and automobile sectors in Mexico have played an important role in explaining this phenomenon. We also provide our outlook for the Mexican peso and highlight how a sluggish domestic and global economy, along with heightened political risk, will likely lead the central bank to cut rates in the not-too-distant future, in our view. These factors should see the peso gradually soften over time. Looking ahead, we believe Mexico’s economy is likely to continue to stagnate as weak momentum carries into 2019 and 2020. As political risk materializes, and as a global and U.S. deceleration continues, we believe this combination will eventually lead to weaker growth and inflation dynamics in Mexico.

Why Is Mexico’s Economy So Weak?

In mid-2016, real GDP growth in Mexico was cruising along at about a 3% pace, while economic growth in the United States was slowing, falling to just 1.3% year-over-year in Q2-2016. Since then, however, the economic fortunes of the two countries have reversed. The U.S. economy has accelerated, with real GDP growth climbing to 3.1% year-over-year in Q4-2018, while Mexican economic growth is sub-2% at present (Figure 1). Given how important the U.S. economy is to its southern neighbor, why has the Mexican economy underperformed to such an extent? 

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