Mexican Economy Threatened by USA’s Economic Slowdown

Mexico could face a protracted economic downturn in 2012 if the USA continues its economic slowdown, with the world’s largest economy having experienced a ceiling-debt crisis in 2011. Mexico is reliant on the USA for its exports, and consumers and businesses could feel the pinch should demand in the North American country fall. However, Mexico, as the second-largest economy in Latin America, continues to hold a strong consumer market, with opportunities for investors.

  • The Mexican economy is closely interlinked with the USA, sending 80.0% of its total exports to the USA in 2010. Negative economic shifts in the USA can thus impact Mexican businesses and consumers, reducing exports, investments and remittances inflows, as well as impacting labour markets;
  • The US debt-ceiling crisis and projected marginal economic expansion in 2011 point to a continued economic slowdown in the country in 2012. However, although Mexico stands to be affected, its increasingly diversified exports, large domestic consumer market and expanding economy mean the country is somewhat protected from external shocks. Mexican annual real GDP growth stood at 5.4% in 2010.

Implications

Manufacturers are most vulnerable to a fall in orders from the USA, although the large size of the Mexican market ensures high domestic demand:

  • Mexico’s economy was hit by a hard recession in 2009 as a result of the global economic downturn of 2008-2009, the impact of which was magnified by its origin in the USA, but strong manufacturing exports and a rise in domestic demand led to a solid recovery in 2010. However, with the US economy seeing a slowdown throughout 2011, Mexico is again in danger of being entangled in a regional economic crisis;
  • Mexico is especially exposed to the US market through its exports, which are overwhelmingly USA-bound. A fall in US demand would hit Mexican manufacturers and businesses directly, stunting production and household incomes. However, Mexico has continued to diversify its export markets over 2005-2010, with China and Brazil growing in prominence. In 2010, exports to the USA made up 23.1% of Mexico’s total GDP;

Mexico’s FDI Inflows and Exports to the USA: 2005-2010

 

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Source: International Monetary Fund (IMF), Direction of Trade Statistics, UNCTAD

  • With Mexicans the dominant foreign-born resident group in the USA, remittances inflows to Mexico would also be impacted by economic uncertainty across the border as unemployment levels rise and industries, especially construction, scale down. Remittances inflows to Mexico expanded by 13.1% annually in 2010;
  • The USA is a major investor in Mexico, responsible for the majority share of Foreign Direct Investment (FDI) inflows in 2010. Tougher market conditions mean investors are more risk averse and less likely to finance Mexican start-ups and projects. Mexico’s FDI inflows expanded annually by 9.3% in real terms in 2010;
  • The cumulative effect of these US-related fiscal factors could raise unemployment, lower household incomes, erode consumer purchasing power and thus limit consumer expenditures in Mexico, with the drop in demand hitting local businesses. In the aftermath of the global economic downturn, Mexican average gross income levels dropped by 7.1% in real terms in 2009 annually;
  • Nonetheless, stable economic expansion and subsequent increases in wages and spending levels over of 2005-2010 have given the country a buffer against external economic shocks, while strong fundamentals remain for foreign investors. Real consumer expenditure increased by 11.0% over 2005-2010.

Prospects

  • The USA is expected to see marginal real annual GDP growth of 1.5% in 2011 and 1.8% in 2012, as its own debt predicament along with the tremors emanating from the eurozone sovereign debt crisis continue to depress global markets. Mexico is projected to see solid real annual GDP growth of 3.8% in 2011 and 3.6% in 2012;

Mexico and USA Real GDP Growth: 2005-2015

 

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Source: Euromonitor International from International Monetary Fund (IMF), International Financial Statistics and World Economic Outlook/UN/national statistics
 
  • The risks of a debt contagion into Mexico remain low. According to an August 2011 IMF assessment, the country’s monetary policy is appropriately supportive, with contained inflation pressures. A young and expanding population, as well as an emerging middle class, should give confidence to businesses going forward, with real annual consumer expenditure expected to rise by 13.9% over 2011-2015;
  • Nonetheless, a worsening of conditions in the USA in 2012 would certainly hit the Mexican economy, specifically through lowered demand for Mexican exports and falling remittances inflows. The country’s central bank may be well prepared to face a crisis, announcing in early January 2012 of record international reserves, which amounted to US$142.4 billion in 2011.