For Bloomberg Economics analysts, The United States will invariably enter a prolonged recession Next yeartowards the second semester.
The foregoing will inevitably drag Mexico into the same circumstance. The country will also enter recession and fiscal and monetary policies in both countries are unlikely to provide much relief, most likely to remain tight to guard against more challenging global financial conditions.
prolonged recession in the US
More than the recession in the United States, which is considered a fact, or some other circumstances that have even been seen to benefit Mexico (Nearshoring, energy crisis, rate hikes, etc.), the greatest risk for the country in 2023 will be a longer and/or deeper recession in our main trading partner.
The United States has been in recession many times, that has an impact on Mexico. However, our country also rebounds significantly when the US economy begins a growth cycle.
On this occasion, the risks for the US economy appear to be the magnitude or duration of a possible recession.there are more and more voices that assure that this phenomenon is a calculated risk of the Fed, but like all calculations, it can get out of control.
If the Fed itself initially dismissed price growth, with the historic “transitory trajectory” fiasco, why can’t it err in estimating a short or shallow recession and arrive at a reverse phenomenon?
The challenges in 2023 are serious, diverse and, some, even of unknown magnitude due to their impact on the different variables of the economy of a region, a country or the world. In Mexico the situation is similar.
High rates all year 2023
For Bloomberg Economics, monetary conditions are already tight, but they expect that Banxico will further increase interest rates given inflation risks and uncertain financial conditions. Resilient inflation and a high US federal funds rate mean there is no room for interest rate cuts until 2024.
In other words, in 2023, at some point, the peak in the interest rate rise cycle will be reached, the famous “terminal rate”, but that does not mean that a reverse cycle will begin, on the contrary, there will be a pause that could last even up to a full semester. A rate cut is not expected at least until before the first quarter of the yearas long as phenomena that could impact the global economy no longer occur.
In this sense, Bloomberg specialists believe that headline and core inflation should fall over the next year, but both indicators will remain above Banxico’s target. “Lower non-core food inflation in line with diminishing supply shocks and base effects should explain most of the decline. The more resistant underlying prices can limit the fall ”, explains the analysis of the financial agency.
Growth, inertial rebound at start of 2023, slowdown thereafter
In terms of growth, Bloomberg Economics specialists consider that Mexican activity increased more than what the central bank and analyst consensus expected in 2022, said growth will support an inertial trajectory for the first months of 2023, when investment and exports should benefit from US demand and from companies relocating their global supply chains. Tight fiscal and monetary policies to contain public debt and inflation will be a drag, but also a necessary anchor in a difficult global environment.
The analysis area of said agency believes that growth could be higher if the government adopted more constructive rhetoric, but that seems unlikely. Economic activity in Mexico will fall in the second semester, with the start of the recession in the United States.
According to their projections, GDP growth is expected to fall to 1.4 percent in 2023from a level of 3.1 percent in 2022, with a slowdown in activity in the first half and a fall in the second half.
After rising earlier in the year, Mexico’s exports should be the main drag on growth as the United States faces recession. Consumption may also see some headwinds from the recession. Softer US labor market conditions will affect household income through fewer remittances sent home by Mexican workers.
Some tax risks
According to the analysis, no forthcoming fiscal stimulus is expected. The 2023 budget points to a deficit of 3.6 percent of GDP, compared to an estimated gap of 3.0 percent in 2022. Lower oil revenues, higher interest payments, and spending on flagship social programs and investment projects account for most of the broader deficit. Optimistic growth assumptions led to overestimated revenue figures in the budget. That may require spending cuts to meet the goal.
There will be an arrangement in energy matters
Bloomberg considers in his analysis that the negotiations on Mexico’s energy policies, which began in July under the USMCA, be resolved without tariffs or sanctions on exports, although he does not mention details in this regard.
Thus, in a year 2023 that will be very complex, this US agency concludes that for Mexico the great threat to its economy is, by far, the possibility of a deep and/or long-lasting recession in its main trading partner: the United States.
By Antonio Sandoval
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