Exports, stimulus throw lifeline to Mexico’s battered economy

In an arid valley in central Mexico, one of the world’s largest automotive suppliers is preparing to open a new plant to produce components for North America, underpinning the export business that has kept the country’s struggling economy ticking over.

The automotive industry forms the core of manufacturing output, which makes up almost a fifth of Mexico’s economy.

Buoyed by the prospect of a revival north of the border, Mexico’s government is revising up its 2021 growth forecast to 5.0-5.5%, and Finance Minister Arturo Herrera said the US stimulus plan was “very important” to the country.

Private sector analysts are doing the same, with JPMorgan recently raising its 2021 estimate for the second time this year to 5.6%.

“If it weren’t for such a strong programme in the United States this year, Mexico might be growing 2.5% or 3%,” said Gabriel Lozano, the US bank’s chief economist for Mexico.

Mexico has committed funds worth about 1.3% of GDP to reviving its economy, according to International Monetary Fund (IMF) calculations. In Brazil, by contrast, it is 6.2%.

Yet despite that, Mexico’s economy is expected to grow by 4.3% this year versus 3.6% for Brazil, the IMF estimates. Export exposure is one reason.

Worth some $360 billion before the pandemic, according to US official data, Mexican annual exports to the United States are equivalent to about a third of GDP. Brazil’s US exports were worth under $31 billion in 2019.

The difference between Latin America’s two biggest economies also shows up in financial markets: while the Mexican stock exchange has gained 4.9% so far in 2020, the Brazilian exchange has lost 8.2%, when measured in dollars.

Nevertheless, some analysts and bosses in Mexico have their doubts. They note that appetite for manufactured goods abroad contrasts with flagging domestic demand, with Mexican fixed capital investment plummeting more than 18% last year.

How well Mexico recovers will depend in part on the government’s ability to overcome tensions with business and encourage investment in manufacturing, which could profit from a drive to regionalize supply chains away from Asia under USMCA.

Drawn to lower-cost Mexico to get a competitive edge, companies are watching nervously to see if the government’s moves to strengthen state control of the electricity market will affect energy-intensive sectors like carmaking.

“The electricity sector is decisive for the Mexican economy to grow steadily, but for this, the state must guarantee the principles of free competition and legal certainty,” the American Chamber of Commerce (AmCham) in Mexico said last month.

The new Continental plant in Aguascalientes state should benefit from the new United States-Mexico-Canada (USMCA) trade deal and US President Joe Biden’s $1.9 trillion stimulus plan to revive growth after the coronavirus pandemic.