27/02/2024 - Mexico’s growth has proven resilient and nearshoring is bringing new opportunities, with growth supported by domestic demand on the back of a strong labour market, investment trending up and continued dynamism in export performance, according to a new OECD report.

However, to fully realise Mexico’s future growth potential will require structural reforms to tackle long standing challenges, to boost productivity and reduce inequalities of opportunity.

Boosting investment in quality education, continuing efforts to boost female labour participation and generally improving the inclusiveness of the labour market, while boosting digital connectivity across the country, as well as anti-corruption efforts and investment in renewables will help Mexico harness nearshoring related growth opportunities.

After growing by 3.1% in 2023, GDP growth is projected to decelerate to 2.5% this year and to 2.0% in 2025. Slowing activity in the United States, Mexico’s main trading partner, will weigh on export dynamism, but domestic demand will sustain growth and inflation is expected to decline further. Headline inflation has gradually come down from its peak of 8.7% in August 2022 to 5.5% in 2023 and is expected to decline further to 4.1% this year and 3.2% in 2025. Core inflation is also falling, but it remains more persistent, especially in services.

Mexico's fiscal policy has a strong track record of attaining fiscal targets and keeping public debt low. However, at 16.7% of GDP, Mexico has the lowest tax-to-GDP ratio in the OECD. There is opportunity to boost tax revenues while remaining internationally competitive, supporting continued fiscal prudence while increasing public expenditure on productivity enhancing areas like education, infrastructure, the digital and green transitions and the fight against corruption and crime. Upgrading the fiscal framework would also help build increased resilience to future shocks, including by creating the fiscal space to provide support during downturns.

Geographic proximity to the United States and structural advantages, including openness to foreign trade and investment underpinned by extensive use of trade agreements, a large domestic market, and political stability, provide significant opportunities for Mexico to capture additional links in value chains. Making use of renewable energy resources could also become a competitive advantage to attract more investment from companies seeking to decarbonise their production. Harnessing these opportunities will require addressing long-standing challenges, such as low productivity and high inequality of opportunity, which have hindered Mexico from realising its full growth potential.

“Mexico has navigated the challenging global economic environment very well. Monetary policy responded decisively to high inflation. Combined with the effects of falling commodity prices and the exchange rate appreciation, inflation is gradually falling back towards target. Monetary policy should remain restrictive to ensure the declining trend continues,” OECD Secretary-General Mathias Cormann said, presenting the Survey alongside Mexico’s Undersecretary of Finance and Public Credit Gabriel Yorio González. “Boosting productivity is fundamental. Gradually increasing tax revenues would help address spending needs in productivity-enhancing areas, such as education, while maintaining fiscal prudence. Upgrading digital infrastructure, reducing the regulatory burden on firms, increasing competition and supporting female workforce participation would boost business dynamism to help spur long-term growth.”

Despite improvements, through for example, a recent increase in female labour force participation and labour market reforms, inequalities of opportunity remain high in Mexico. Establishing a national early childhood education system and gradually expanding elderly formal care services would also help facilitate greater female labour market participation as women currently bear a disproportionate share of domestic and care responsibilities.

Improving educational outcomes, by helping Mexicans gain the skills needed to participate in and benefit from an evolving job market, and reducing informality are also key to reinforcing growth potential.

Access to adequate housing remains challenging in Mexico. High prices and limited access to credit means that many citizens cannot afford to purchase a house. An underdeveloped housing rental market and insufficient supply of social and affordable housing leads many households to self-build or to reside in informal settlements, fuelling spatial segregation that negatively impacting already vulnerable groups who then have limited access to jobs, transport and urban services. Recent policies targeted towards low-income households are welcome, and expanding the range of housing subsidies and fostering the development of a social rental housing sector would be valuable additional steps.

See the Survey Overview with key findings and charts (this link can be used in media articles).

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