Mexico Enters 2023 With Recession Risk Due to US Slowdown

Mexico's economy will see lower inflation in 2023 but a high risk of recession due to an expected slowdown in the United States, its main trade partner.

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Gabriela Siller, director of economic-financial analysis at Banco Base, said that Mexico's gross domestic product (GDP) could grow 1.7 percent in 2023, down from the forecast of 3.1 percent for 2022.

"Mexico's economic slowdown is expected given that the United States is slowing down, and there is an almost 50-percent probability of a mild recession," Siller said, adding that inflation in Mexico will decline to 5 percent in 2023, with the key interest rate hovering between 11.25 and 11.50 percent by the end of the year.

"In 2023, foreign direct investment, remittances and exports are going to slow down, possibly leading the currency to depreciate to the level of 20.3 pesos to the U.S. dollar," Siller said, adding that the most formidable challenge for Mexico will be its fraught trade ties with the United States due to U.S. complaints against the Mexican government's new energy policies.

"If the process goes to a (dispute settlement) panel and it rules against Mexico, it could face fines or tariffs," in addition to "the possibility of recession in the United States, given the aggressive increase in interest rates," warned Siller.

The Citibanamex financial group also noted the latest data suggests the U.S. economy will enter a recession by the end of 2023.

"Mexico's economic outlook has been complicated by various global factors, such as a forecast of more restrictive conditions in financial markets, high inflation rates, and a significant economic slowdown in 2023," the report said, adding that "faced with this deteriorated global environment, there is an increased need to promote a domestic environment that boosts short and medium-term growth." 

The United Nations Economic Commission for Latin America (ECLAC) estimated that the Mexican economy will grow just by 1.1 percent in 2023 and suggested the country work on structural issues to promote higher-than-normal growth.

"The process of rising inflation that began in mid-2020 at the regional level seems to be subsiding, and in recent months there are signs of a slowdown in the dynamics of regional inflation," the commission said in its "Preliminary Overview of the Economies of Latin America and the Caribbean 2022" released this month.

"The future dynamics of inflation in the region are closely linked to what happens with inflation in the rest of the world, since its determinants are very similar," it added.

Mexico's Central Bank estimates inflation could drop to the target rate of 3 percent by the third quarter of 2024 after rising to 8.1 percent in 2022 and lowering to 4.2 percent in 2023.