The economic forecasts for Mexico are cooling down. The three key factors that led to the recovery of the Mexican economy after 2003 are taking an unfavourable turn, exposing the vulnerability of the present model of growth. 1. The growth of the USA will be the lowest since 2002. 2. The car industry sector (the absolute driving force behind the Mexican industry) is undergoing a moment of great weakness. 3. The threat facing the manufacturing sector from Chinese competition is growing. Therefore, deceleration seems inevitable.
Thus, while in 2006, economic growth in Mexico reached 4.8%, in 2007, it fell to 3.5% and, in 2008, forecasts suggest it will reach only 2%. This growth of the GDP is too low to reduce the gap in the standard of living with regard to developed countries and approach the persistent problem of widespread poverty. To increase growth and reduce poverty, the president, Felipe Calderón, despite governing without a majority rule, has managed to implement two important reforms: the pensions reform and, above all, the tax reform, which, albeit not very ambitious, marks a fundamental step in the direction of strengthening Mexico’s public accounts. The new fiscal structure will increase public revenue by 2 points of the GDP, which will allow a further increase in the resources used to support essential spending requirements. Furthermore, the tax reform will improve the efficiency of the tax collection process and reduce the dependence on oil revenue.
Opening-up to the exterior
Mexico has also implemented important reforms in foreign trade, including commercial agreements with many countries. In addition, the duties with regard to other countries have been reduced, even though they remain higher than the levels of developed countries. The additional reductions of the duties would bring considerable gains, since they would create new opportunities for the enterprises to access inputs and foreign technologies that are essential for growth and competition. It is also necessary to reduce the heavy commercial dependence on the USA (80% of Mexican exports go to the USA) and, accordingly, promote exports to other destinations. Mexico has depended on the United States, its main commercial partner, as a result of its geographical location and cheap labour. Exports carry a very important weight in the Mexican GDP (30%). It is true that when things are going well for the USA, things go wonderfully for Mexico, but when it has problems, as was the case with the September 11 attacks, the economy grinds to a halt. Any crisis affecting the USA, such as now, immediately affects Mexico. This is the reason for the need for finding new commercial partners, markets and strategic alliances to diversify exports and not depend on the situation of the USA.
Money sent by emigrants
One feature of this dependence is the reception of money sent by Mexican emigrants living in the USA. The economic expansion of the USA during the years of Bill Clinton’s government attracted many Mexican workers, especially in the construction sector. With the property boom, the Mexican immigrants, who used to work in farming, moved over to construction, which, in turn, attracted more Mexican workers to the USA. However, with the property market crisis in the USA, this influx of Mexican workers has gradually fallen. This occurs because the construction sector was the main runway on which the new immigrants chose to land. As a result, the amount of money sent from the USA to Mexico has fallen every month since it reached its peak in May 2006 (the construction of homes in the USA began to slow down in June 2006). However, we must remember that the amount of money sent still represents the second highest revenue in the balance of payments (24,000 million dollars in 2007), at a great distance from oil, which is the most important item (45,000 million dollars), but almost twice the amount that corresponds to tourism, the third highest revenue (13,000 million).
This reduction in the amount sent could be very difficult for Mexico since it is reducing its rate of consumption, employment and economic growth. The problem can worsen in terms of a higher level of unemployment because the level of emigration from Mexico to the USA has also fallen, among other things because there are fewer job opportunities there. This is joined by the fact that many Mexican immigrants could lose their jobs in the USA and return to their country of origin. Furthermore, unemployment in Mexico increased from 3.5% at the beginning of 2007 to 4.1% in January 2008.
The outlook of the world economy for 2008 is particularly unfavourable. The solvency crisis generated by high-risk mortgage defaults in the USA has spread to all kinds of credit markets in the main economic areas. This is joined by a fall in the growth of consumption and the housing market crisis in the USA, which has reduced the property wealth of homes and their capacity for finance. This has brought about a heavy fall in residential investment and threatens to seriously affect consumerism during the coming quarters. Any crisis in the USA, such as the present one, immediately spreads in an intense manner to Mexico. This explains why Mexico needs to implement reforms in order to favour the necessary national and foreign investment and obtain higher economic growth to recover from its present critical situation.