Mexico’s economic growth is accelerating, but the outlook is weakening


Jesus Canas and Juliette Coia

May 23, 2022

May 2022 economic report
GDP, real
January–March 22nd
employment, formal
April 22nd
April 22nd
April 22nd
3.6% q/q 97,000 jobs m/m 7.6% YoY 20.1

Mexico’s GDP grew at an annualized 3.6 percent in the first quarter of 2022, up from dismal fourth-quarter growth of 0.1 percent. Nevertheless, GDP growth in the first quarter was below analysts’ expectations of 4.6 percent. Mexico’s GDP outlook for 2022 continues to deteriorate, mainly due to slowing global economic growth, ongoing supply chain shortages, higher inflation and tighter monetary policy. The Banco de México consensus forecast for 2022 GDP growth fell again in April to 2.1 percent (Q4/Q4) (Table 1). Inflation continued to rise due to price pressures related to energy and commodities.

Table 1: Consensus forecasts for growth and inflation in Mexico in 2022

April march
Real GDP growth (Q4/Q4) 2.1 2.3
Real GDP (average year/year) 1.7 1.8
CPI (Dec ’22/Dec ’21) 6.8 5.8
Exchange rate – pesos/dollars (end of the year) 21.1 21.3
NOTE: CPI refers to consumer price index. The survey period was from April 22nd to 28th.
SOURCES: Encuesta sobre las Expectativas de los Especialistas en Economía del Sector Private: April 2022 (Communiqué on economic expectations, Banco de México, April 2022).

The latest available data shows that industrial production, exports, retail sales and employment increased while remittances fell. In April, the peso appreciated against the dollar, but inflation remained high.

Output grows in the first quarter of 2022

According to preliminary estimates, Mexico’s GDP grew at an annualized rate of 3.6 percent in the first quarter (Diagram 1). Both the manufacturing sector (manufacturing, construction, utilities and mining) and the service sector (wholesale and retail trade, transportation, business services) grew 4.4 percent, while agricultural output fell 7.6 percent.

Diagram 1

Industrial production is expanded

The three-month moving average of Mexico’s industrial production (IP) index — which includes manufacturing, construction, oil & gas exploration and utilities — improved in March from February (Diagram 2). On a monthly basis and on an unsmoothed basis, IP rose 0.4 percent in March. North of the border, US IP rose 1.1 percent in April after rising 0.9 percent in March. The correlation between intellectual property in Mexico and the US has increased significantly since the early 1990s with the increase in intra-industry trade between the two countries. Manufacturing in Mexico could experience some slowdown in the second quarter, particularly if US consumer demand softens on the back of rising prices and higher interest rates.

Diagram 2

Exports gain momentum as oil prices rise

The three-month moving average of total exports rose 1.2 percent in March, while oil exports grew 9.2 percent and the much larger manufacturing export category grew 0.7 percent (Diagram 3). On a monthly basis and on an unsmoothed basis, total exports fell 3.9 percent in March, while oil exports rose 13.7 percent but manufacturing exports fell 5.1 percent. The rise in oil prices has contributed to recent growth in oil exports as Mexico’s oil production has been flat since mid-2021. Mexico’s total real monthly exports in March were 12.8 percent above pre-pandemic levels (February 2020) and 9.7 percent above 12 months earlier.

Diagram 3

retail sales are growing

Mexico’s real retail sales index rose 0.6 percent month-on-month based on a three-month moving average through February (Diagram 4). On a monthly basis and on an unsmoothed basis, retail sales rose 0.8 percent in February — the same rate as in January. Retail sales reached pre-pandemic levels in October 2021 (February 2020).

Diagram 4

Payroll will be expanded in April

Formal sector employment – jobs with benefits and pensions – grew an annualized 5.7 percent (97,000 jobs) in April after rising 5.1 percent in March (Diagram 5). Year-on-year employment growth was 4.7 percent in April. Total employment, which includes 56.6 million workers and includes jobs in the informal sector, rose 6.2 percent year-on-year in the fourth quarter of 2021. The unemployment rate was 3.5 percent in March, compared to 3.7 percent in February. Employment in Mexico recovered to pre-pandemic levels in September 2021, although GDP remains 1.6 percent below its pre-pandemic level.

Diagram 5

Peso is gaining some ground against the US Dollar

The Mexican currency averaged 20.1 pesos per dollar in April, up slightly from March (Diagram 6). However, the peso is still 6.3 percent below its pre-pandemic level in February 2020. The peso has been under pressure due to high inflation and increasing uncertainty about domestic and global growth.

Diagram 6

Remittances to Mexico in 2022

The three-month moving average of real remittances to Mexico fell for the third straight month in March, falling 2.4 percent from February (Diagram 7). On a monthly basis and on an unsmoothed basis, remittances were down 4.2 percent. Most likely, remittance flows to Mexico are slowing due to high inflation in the US and elsewhere, which is eroding disposable income, including funds for remittances. Remittances to Mexico peaked in November 2021. The peso’s devaluation between February and April 2020 contributed to record transfers of $50 billion in 2021 — as did Mexican migrants abroad, who sent more money to help relatives buy groceries or cover basic expenses during the pandemic cover.

Diagram 7

The proportion of foreign-owned government debt is falling

The three-month moving average of foreign-owned Mexican government bonds fell to 17.7 percent in April, down 1.2 percent from its March level (Diagram 8). The level of government debt held by foreigners is an indicator of Mexico’s exposure to international investors and a sign of confidence in the Mexican economy. It is notable that the metric has been in a downtrend since its peak in early 2015.

Diagram 8

Inflation keeps rising

Mexico’s Consumer Price Index (CPI) rose 7.6 percent in April over the previous 12 months, rising slightly faster than in March (Diagram 9). Core CPI inflation (excluding food and energy) rose 7.1 percent in April over the previous 12 months. In May, Mexico’s central bank raised interest rates to 7 percent, the fourth straight hike since December by 50 basis points. In the public announcement accompanying the interest rate decision, the central bank cited several factors for the hike, including ongoing global and domestic inflationary pressures related to the pandemic; increases in the prices of energy, agricultural and animal products; and the intensification of geopolitical turmoil.

Diagram 9

About the authors

Jesus Canas

Cañas is Senior Business Economist in the Research Division of the Federal Reserve Bank of Dallas.

Julia Coia

Coia is a Research Analyst in the Research Department of the Federal Reserve Bank of Dallas

The views expressed are those of the authors and should not be attributed to the Federal Reserve Bank of Dallas or the Federal Reserve System.


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