Decoding GDP
Last week, INEGI published the revised GDP figure for the fourth quarter of last year ('traditional estimate'). It confirmed that economic activity ended up growing 1.5 percent in 2024. A relevant slowdown with respect to the 3.3 percent growth in 2023, especially in an election year, in which, in addition, the government significantly increased public spending, which led to the deficit from 4.3 to 5.7 percent of GDP. Several colleagues comment that Mexico could find itself on the brink of a recession, as I commented in this space a few weeks ago ("On GDP and public finances in 2024", February 4). Likewise, last week the staff of the Bank of Mexico revised its 2025 growth forecast from 1.2 to 0.6 percent. However, before trying to categorize which phase of the cycle the Mexican economy is in – a matter that is the responsibility of the Committee for Dating the Cycles of the Mexican Economy – I believe that there are four issues to comment on regarding last year's GDP:
(1) Statistical irregularities. Because there were many atypical events in the first half of last year, once they no longer occurred in the third quarter, the economy saw very significant growth. GDP grew 0.9 percent over the previous quarter, which would be 3.6 percent annualized, to compare with the data in the United States. Did Mexico experience a “boom” in 3Q24? No, of course not. It only reflected that the atypical events ended. Which ones? Multiple roadblocks, partly caused by electoral campaigns and partly due to organized crime activities. In addition, the United States government halted avocado imports for several days, and the international trade software managed by Mexican customs failed on several occasions, limiting both imports and exports, among other problems. Since it was not a “ boom ” that the Mexican economy experienced in the third quarter, the probability that the economy would register a contraction in the fourth quarter was very high, simply because there were no longer any outlier observations (“Economic Growth: Beyond Appearances,” November 26). Thus, just as the economy did not observe a “boom” in the third quarter of last year, the contraction in the fourth quarter is not indicative of a recession, as such, either.
(2) Statistical irregularities that I believe will not occur this year. For many years, growth in Mexico has slowed significantly during the first year of each administration. In my opinion, this occurs due to two things: (a) Current spending slows down due to the change of staff in the ministries, particularly the Ministry of Finance and Public Credit (SHCP); and (b) a relevant adjustment in public policy, such as the cancellation of the New Mexico City Airport at the end of 2018 or the change in the formula with which housing subsidies are granted in 2013. In this first year of President Sheinbaum, many secretaries from the end of the previous six-year term are repeating their position, in particular, the staff of the SHCP, so current spending should not slow down and I do not see any economic policy error that has a similar impact to those I mentioned in 2018 and 2013.
(3) Impact of the increase in public spending. In all this, where is the increase in public spending in 2024? This is very difficult to explain because the increase in public investment in the INEGI data appears in 2023 and not in 2024 when the deficit increase took place. It is like saying that you hit the target first and then you shoot. In the Treasury data, spending on communications and transportation – where we normally observe the resources allocated to public works – showed an annual increase of 2.5 percent and a fall of 30.5 percent – in real terms – in 2023, while in 2024 annual increases of 46.8 and 34.6 percent were observed in 2024, respectively. This is in line with the increase in the deficit in 2024. However, in the INEGI data, public investment grew 17.8 percent in 2023, while the third quarter of 2024 that we have available registered an annual contraction of 0.7 percent. In my opinion, this has to do with two things. On the one hand, unlike most countries where spending is reported as accrued, in Mexico fiscal accounting is in cash. That is, in most countries an expense in November begins to appear from January with a discount factor, while in Mexico that expense does not appear in the statistics until the payment is made, in this case, in November.
The other issue is that INEGI reports the impact of public spending on economic activity, regardless of when it is paid. In this way, the government can ask a contractor to do a job in 2023 and have it reflected in the INEGI national accounts statistics for that year and pay for it in 2024. This also coincides with most of the inaugurations carried out by former President López Obrador, concentrated at the end of 2023 and beginning of 2024. Now, a prospective aspect of this is that a good part of the fiscal consolidation that the government is carrying out this year should not have as much impact on economic activity this year, given that the economy already experienced it last year.
(4) The outlook for global manufacturing in 2025. Manufacturing has shown weakness globally after the pandemic. This was due to consumers reallocating their spending from goods during the pandemic to services. However, it has been observed that this trend has begun to reverse and, for example, industrial production in the US contracted 0.2 percent in 2024 and this year a growth of around 0.4 percent is anticipated. This is the main economic link between Mexico and the United States, with the current supply chains, without the need for more nearshoring .
elfinanciero
