Only this year the Mexican economy recovered to its pre-COVID level. Its economic performance has exceeded all expectations.
From nearshoring to friend-shoring
The Mexican economy has always been closely linked to the economic conditions of its powerful American neighbour, which is even more the case today.
Since Trump's outbreak of the trade war against China, many companies have wanted to reduce their dependence on the Middle Kingdom. The COVID crisis, which disrupted global logistics, has also called into question the long supply chains, fragile by nature in the face of health, political or climate hazards. This awareness encouraged nearshoring, the location of production close to consumption, in opposition to the offshoring that had sent the factories to the other side of the world.
With cheap skilled labour, transportation facilities and the free trade agreement between the two countries, Mexico is the ideal destination to bring factories closer to the American consumer. This is all the more the case because the Biden administration, in addition to continuing the trade war against China, advocates friendship trade between friends. And with occasional political friction, Mexico maintains friendly relations with Washington.
Exports at the top
Mexico has benefited more from the US recovery and is better positioned on the new world trade map than its competitors. Mexican exports have peaked. In the first six months of the year, goods worth $236 billion crossed the border into the United States, compared to $224 billion in the first half of 2022 and only $171 billion in 2018, when the trade war broke out.
At the same time, shipments of Chinese products to the United States increased from 271 billion in the first half of 2018 to 203 billion this year. By far the largest supplier to the United States five years ago, China has left this place in Mexico. And the country should consolidate this number one position in the first few years. Companies are scrambling to set up in Mexico. After foreign investment of $36.2 billion in 2022, more than 100 projects, totalling $48 billion, have already been announced this year. Tesla's largest plant is due to be built not far from the US border and will eventually produce a million cars.
Economic renewal
With the surge in exports and the influx of foreign investment, Mexican economic activity grew by 1% in the first three months of the year and again by 0.8% in the second quarter. On an annual basis, GDP grew by almost 4%. This performance is remarkable as the Central Bank lowered its key interest rate from 4% to an all-time high of 11.25% to contain price slippage. But this surge in the cost of credit has not ravaged domestic demand.
The construction sector has thus kept its head above water. Household consumption continued to grow thanks to a favourable economic environment. The unemployment rate fell this year to its lowest level in two decades. Remittances from Mexican workers to the United States have never been more critical. These "remedies" have practically doubled in five years, reaching more than $16 billion in the second quarter. The fall in inflation to less than 5% in July also boosted consumer resilience.
What future?
Economic developments in Mexico in the coming quarters will depend on the US economy. However, the country is now strong enough to overcome a possible crisis and has several assets to resume the path of economic expansion quickly.
The first is its essential positioning in the new map of world trade. Setting up factories to meet American demand is a significant trend. It will continue in the coming years and boost investment and employment.
With debt at 50% of GDP and a contained deficit, sound public finances also offer room for manoeuvre to cushion an overly sharp economic slowdown. The Central Bank will also be able to relax its policy, which is now very restrictive. Finally, the "remesas" are a safety net for Mexican households.
An interesting stock market
Mexico's economic revival has put Mexican assets back on the radar of international investors. The Mexico Stock Exchange is a diversified market where the consumer sector accounts for 35%, ahead of communication services (18%), basic materials (17%), etc.
The peso has become overvalued with the influx of foreign capital, the export boom and the massive remittance of migrant workers to their families. However, the promising prospects of the Mexico Stock Exchange offset the expected depreciation of the peso.
However, it is an emerging market with relatively high volatility and is, therefore, unsuitable for defensive investors. On the other hand, Mexican equities are gripping at 5% as part of a neutral or dynamic portfolio.