OECD Economic Surveys: Mexico 2024

1. Realising Mexico’s large potential

After a slow recovery from the pandemic, the Mexican economy has navigated well the global environment of tightening financial conditions and heightened uncertainty (Figure 1.1, panel A). Mexico’s sound macroeconomic policies, with a track record for prudent fiscal management, a successful inflation targeting regime and a flexible exchange rate, have ensured economic stability. Inflation is lower than the OECD average (Figure 1.2). It is gradually declining, after a forceful reaction by the Central Bank, with core inflation proving more persistent. Public debt remains at a prudent level, thanks to a strong commitment to meet fiscal targets.

Going forward, Mexico is well placed to benefit from changes in the global economy and the ongoing redrawing of value chains as response to heightened geo-political tensions and supply chains disruptions during the pandemic. Nearshoring trends, by which companies are seeking to reduce supply risks and costs by locating closer to their final markets, create possibilities for Mexico to capture additional links in value chains. Mexico's advantages include wide trade agreements, covering 50 countries representing 55% of world's GDP, a 3000 kilometres border with the United States, a large domestic market, access to both the Atlantic and the Pacific oceans, and macroeconomic, political and social stability. Mexico’s already existing close integration in some manufacturing value chains and the recently updated North America trade agreement are other key additional advantages. While many nearshoring-related investment plans have been announced, their impact on macroeconomic indicators is still preliminary. Mexico has recently become the most important source of United States imports. (Figure 1.1, panel B). Industrial parks at border states are nearly at full capacity, warehouses rental prices are trending up and construction of industrial spaces is also increasing strongly (Newmark, 2023[1]). Firms surveys suggest that the greatest impact would happen over the next two years. Fully harnessing nearshoring trends would require tackling long-standing challenges such as low productivity and high inequalities, which have prevented so far Mexico from being a high-growth economy (Figure 1.3).

Figure 1.1. GDP growth has been resilient, supported by ongoing nearshoring

Note: LAC is a simple average of Chile, Colombia, Costa Rica, Argentina, Brazil, and Peru. EA17 is a weighted average of the 17 countries that are members of both OECD and Euro area.

Source: OECD Economic Outlook database; and UN Comtrade.

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Productivity has long been stagnant and boosting it is a key priority for raising growth and competitiveness. Regional differences in productivity are large, with highly productive and trade-integrated northern states contrasting with southern states. Nearshoring is an opportunity to accelerate the transition from low-cost assembling processes into higher value-added ones. Higher investment in new technologies, addressing infrastructure bottlenecks, improving skills and more competition in key parts of the economy would support that transition. Gradually raising more tax revenues and upgrading the fiscal framework would also facilitate the transition by creating better conditions for needed productivity-enhancing public spending. Greening the economy is a challenge but also offers opportunities. Mexico’s large unused renewable energy resources (Figure 1.4) can be a competitive advantage to attract investment at a moment when global manufacturing activity increasingly seeks to decarbonize its production processes.

Figure 1.2. Inflation is lower than in OECD or regional peers

Economic indicators

1. Indicator reversed so that the right side of the scale corresponds to a better outcome. LAC is a simple average of Chile, Colombia, and Costa Rica.

Source: World Bank; OECD consumer price indices complete database; OECD labour market statistics database; and OECD calculations.

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Figure 1.3. Mexico’s potential to be a high-growth economy remains unrealised

Index of real PPP-adjusted GDP per capita, 2000 = 100

Note: LAC is a simple average of Chile, Colombia, Costa Rica, Argentina, Brazil, and Peru. Dynamic Asia includes India, Indonesia, Malaysia, Philippines, Thailand, and Viet Nam.

Source: World Bank World Development Indicators.

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Figure 1.4. The share of renewable energy is lower than in OECD or regional peers

Sustainability indicators

1. Indicator reversed so that the right side of the scale corresponds to a better outcome. LAC is a simple average of Chile, Colombia, and Costa Rica. GHG emissions per unit of GDP is the production-based CO₂ productivity. Fine particles concentration is mean population exposure to PM2.5.

Source: OECD green growth indicators database; and OECD calculations.

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Income inequality has recently fallen, but gender gaps, unequal education outcomes (Figure 1.5) and informality remain pending challenges to reduce poverty and bolster growth prospects. Female labour market participation has recently increased to 50%, its historical high, but the gender gap in labour participation is the second largest in the OECD. Mexico’s population is relatively young and the average number of years of education is gradually increasing, but the pandemic has exacerbated education inequalities, and further policy efforts to improve education outcomes are warranted. Recent labour market reforms (Box 1.1) have helped to improve labour market conditions for many Mexicans, but there is a need to lower informality, affecting 55% of workers. More than 25% of the population still lives in overcrowded housing, built with inadequate materials, or with poor access to basic services, hindering well-being, productivity, and access to jobs.

Figure 1.5. There is room to improve education outcomes and close gender gaps

Inclusiveness indicators

1. Indicator reversed so that the right side of the scale corresponds to a better outcome. LAC is a simple average of Chile, Colombia, and Costa Rica. Relative poverty rate is the rate after taxes and transfers with poverty line at 60% median household income. Average PISA score is the average scores of math, science and reading.

Source: OECD income distribution database; OECD PISA database; OECD education at a glance database; Eurostat; and OECD calculations.

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Box 1.1. Recent key reforms

Recent key reforms, put in place since the publication of the last Economic Survey in February 2022, include:

• Labour market reforms gradually being implemented to expedite conflict resolution and enhance workers representation and collective bargaining and to reduce fraud in the use of outsourcing (see also Chapter 4).

• A reform of contributory pensions, aiming at increasing coverage and benefits by lowering the minimum number of contribution years to access pensions and introducing a gradual and progressive increase in employers’ contribution rates (see also Chapter 4).

• Increases in the minimum-wage to boost its purchasing power.

This survey reviews recent macroeconomic developments and policy challenges in Chapter 2 and identifies options to address them. Chapter 3 analyses how boosting productivity and fighting climate change is key to harness nearshoring opportunities. Chapter 4 identifies possible avenues to continue reducing inequalities and to bolster growth, while Chapter 5 presents an in-depth assessment of challenges in the housing sector. The main messages of the Survey are:

• Monetary policy will need to remain tight to durably bring inflation back to target. Gradually raising more revenues and greater spending efficiency would allow to respond to spending needs in key areas such as education, public investment or security. Strengthening the fiscal framework would improve the ability of fiscal policy to smooth out economic cycles and support growth during recessions.

• Improving the logistic and digital connectivity of regions and SMEs, reducing the regulatory burden and improving the rule of law would help to boost productivity. Making the most out of nearshoring trends would also require shifting to renewables and improving water governance.

• Facilitating female labour market participation, strengthening skills and reducing informality would help to continue reducing inequalities and are also key to reinforce Mexico’s growth potential.

• Access to adequate housing remains challenging. Housing policies have become more focused on low-income households. Expanding the rental market, addressing urban sprawl and improving urban mobility are pending challenges.

References

[1] Newmark (2023), “Market Reports - Industrial warehouses: Tijuana, Monterrey, Ciudad Juarez, Guadalajara”.