Economic growth is exhibiting a modest recovery after two years of cyclical weakness, averaging 1.4% and 2.1% in 2013 and 2014, respectively, but still below potential output growth (at 2.5%). Growth was led by manufacturing exports, largely emanating from a double digit increase in the automobile sector for the fifth consecutive year. Domestic demand is lagging, with private consumption dragged by low consumer confidence and limited wage growth. Private investment has shown more dynamism recently, from low levels in 2013.
Economic activity is expected to accelerate through 2017, with GDP growth strengthening from 2.9% in 2015 to 3.5% in 2017. Robust growth in the U.S. will support a continued strong performance of manufacturing exports that is expected to translate into a gradual recovery of domestic investment and consumption.
Anticipating a longer-lasting drop in oil prices, the government has already announced spending cuts by 0.7% of GDP in the budget for 2015 and plans further consolidation of public spending in 2016. Lower public spending will have a dampening impact on the pace of economic growth, despite the confidence that fiscal discipline instills on economic agents.
Growth has been weaker than expected and there has not been a strong connection between growth and poverty reduction. The cause of this can be found in the job market as there have not been enough jobs nor enough jobs that pay adequate wages created in recent years. There has also been an increase in the labor force—due to demographic change, net-zero migration to the United States and increased female labor force participation—that the economy has not been able to absorb. On the positive side, both public transfers, particularly in urban areas, and a lower dependency ratio have contributed to lower poverty.
The Mexican government has made progress in its structural reforms agenda in the areas of labor, education, competition policy, financial sector, telecommunications and energy sector legislation, aimed at raising productivity, competitiveness and potential output growth. Attention is now shifting to reform implementation. The opening of the energy sector to private sector participation is particularly promising for boosting growth, as it is expected to increase the production of oil and gas and provide Mexican manufacturers cheaper energy inputs. It will be important to assess the distributional impacts of the reforms, their associated regulations and implementation.