Mexico's labour market weakness indicates the economy is operating below potential, but the strong recovery in the US will help the neighbour pick up growth momentum, the International Monetary Fund has said. The Fund projects a GDP growth of 2.4% this year for Mexico.
"After a sharp slowdown in 2013 — reflecting weak external demand and a decline in construction activity — growth is projected to recover to 2.4% this year."
"The strong recovery in the US in the second quarter of 2014 has triggered a rebound in Mexico's manufacturing production and exports (especially in the automotive sector)."
"In addition, construction activity is firming up, supported by a rebound of residential investment and an increase of government spending on infrastructure."
While the labour market is operating below potential, it is helping to contain inflationary pressures, IMF said.
The unemployment rate has inched up since early 2013, and real wage growth has been subdued. Headline inflation rose to 4.5% year-on-year in early 2014, reflecting one-off effects from tax changes.
"Mexico's inflation rate is expected to stay around 4% in the remainder of 2014, driven by increases in livestock and government-administered prices, before declining gradually in 2015. Core inflation remains close to 3% and long-term inflation expectations are well anchored," the Fund.
IMF has welcomed the Bank of Mexico's commitment to adapting monetary policy in case of upward pressure on prices.
The Mexican central bank cut the policy rate by 50 basis points to 3% in June in the context of limited inflationary pressures and a weak economy while fiscal policy remains broadly neutral.
The Fund said it has supported Mexico's plans to reduce the public sector borrowing requirement to 2.5% of GDP by 2018.
The fiscal outturn for the first half of 2014 has been broadly in line with the Public Sector Borrowing Requirement budget target of slightly over 4% of GDP.
Credit growth slowed down in the first half of 2014 for households and firms, and it was to 8% from 16% last year for the former.
In contrast, lending by the public-owned development banks is growing rapidly helped by a new mandate of promoting micro-financing and lending to underserved sectors, including SMEs.
The IMF said Mexico should carefully monitor the rise in non-performing loans in housing and foreign currency borrowing among some large companies.
While welcoming the increased role of development banks in improving financial inclusion, the Fund advised caution to avoid displacing private bank lending or relaxing credit standards.
The IMF said Mexico needs to boost non-oil revenues, especially if oil revenues are lower than anticipated and called for stricter control of the budget.
The Fund welcomed the creation of an oil stabilisation and saving fund, and the plan to reform the pension system of the two large state-owned companies.