The new president of Mexico and her economic cabinet will not have an easy time navigating the new federal administration, as the prospects for GDP by the end of 2025 are increasingly dim, and analysts even warn of an economic recession.
The main internal factor is the management of public finances, because at the beginning of a new administration it is common for public spending to be slower and private sector investment decisions to stop, due to the change of teams and the learning curve for bureaucrats and legislators, explained Alfredo Coutiño, director for Latin America at Moody’s Analytics.
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“This depressive economic effect is known as the ‘political cycle of the economy’, and it has been present uninterruptedly in the last four decades. Therefore, the least that can be expected from this change of government is a weakening of economic activity, which could turn into an economic contraction if the business climate worsens and uncertainty increases in the face of the new government’s first actions and the lack of experience in managing policy and risk management,” warned Coutiño.
Last week, the Organization for Economic Cooperation and Development (OECD) reduced its outlook for Mexican GDP from 2.0% in May, placing it at 1.2%. “Domestic demand has boosted activity in Brazil, India and Indonesia, but has slowed in Mexico, where the services sector has lost momentum,” said the international organization.
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“There is the possibility of an economic contraction, a recession, it is a complicated situation, it is an economy that is slowing down. There are some factors that will cause this (…) although monetary policy will be less and less restrictive, fiscal policy could be very restrictive and that could generate a fall in aggregate demand and therefore a fall in production,” explained Rodolfo Navarrete, chief economist at Vector Casa de Bolsa, an institution that forecasts a GDP growth of 1.4% for 2025.
Fiscal policy would be restricted, in addition to the change of government, by the commitment of the public administration to reduce the budget deficit, which is expected to be reduced from 5% of GDP in 2024 to 2.5% in 2025, which would imply cuts and adjustments to public spending.
Therefore, analysts are waiting, to finish adjusting their forecasts, for the proposal of the Economic Package 2025, which will be in charge of Rogelio Ramírez de la O, Secretary of the Treasury, and who has a deadline of November 15 to present it to Congress.
“The problem for next year is fundamentally related to public finances. When the Budget comes out, we will review that figure (1.4% for 2025),” Navarrete added.
Víctor Ceja, chief economist at VALMEX, ruled out this possibility because “since the last major crisis in Mexico, in 1994, there have been fundamental changes that have allowed the transition of government to be smoother.”
“For 2025 we have a forecast of 1.4%, we do not see a recession, extraordinary things would have to happen, for example, an abrupt slowdown of the US economy, but we do not see it; a very strong adjustment to public spending, or geopolitical conflicts that can generate an impact at a global level,” Ceja commented.
But he warned that if the budget deficit is not reduced by the end of 2025, there could be a slowdown in the economy in 2026 or 2027, as credit rating agencies would downgrade Mexico’s rating, which would imply an outflow of capital, in addition to a strong depreciation in the exchange rate, and higher interest rates to avoid this outflow of capital.
The political cycle of the economy is not exclusive to Mexico, as it is also present in some emerging economies, especially those in which the exercise of the budget lacks protection against political transition. However, “among the main economies in the region, Mexico is the country where the political cycle is still a very important determinant of the direction of the economy every six years, due to the lack of institutional arrangements that ensure an uninterrupted exercise of the budget in the face of a change of government,” added Coutiño.
Source: expansion
