Mexican economy rebounding from its deepest downturn in decades: IMF

The IMF Staff at the end of 2021 Article IV Mission said the Mexican economy is rebounding from its deepest downturn in decades. Spurred by U.S. growth and rising vaccination rates, it is set to grow by 6.2 percent in 2021 and 4 percent in 2022.

Manufacturing and exports are above pre-pandemic levels, services are re-opening, and employment is recovering. The authorities have successfully maintained external, financial, and fiscal stability in a very challenging period.

Nevertheless, Mexico is bearing a very heavy humanitarian, social, and economic cost. There have been over half a million excess deaths likely linked to COVID-19. Under-employment remains above the peak reached during the global financial crisis; over 4½ million more people are unemployed, under-employed, or available to work (the broad U6 unemployment category) than before the pandemic. Already-high levels of poverty have increased further. The young face sizable learning losses with potentially harmful longerterm effects.

Real income per capita has continued its long-run divergence from the U.S., with projections signaling further divergence ahead. Low productivity growth and high poverty remain Mexico's key problems. Looking forward, the economy will face new challenges from technological shifts and the effects of climate change.

Against this backdrop, the priorities are to safeguard the recovery, preserve economic stability, and promote inclusive and sustainable growth. First and foremost, this will require vaccinating the eligible population as swiftly as possible. Given the economic slack, a supportive near-term fiscal stance would help mitigate scarring and secure the recovery. Targeting this fiscal support toward well-designed social assistance, education, health, and public investment spending would alleviate the burdens on society's most vulnerable and promote more inclusive growth. Such higher, upfront spending would need to be combined with a fiscal reform that is phased-in over the medium term as the economy strengthens. Supply-side reforms to raise productivity and tackle informality would raise investment and potential growth. The present conjuncture, with a tailwind from a strong U.S. rebound, provides a valuable opportunity to decisively address Mexico's challenges.

The authorities have pursued a conservative fiscal policy through the pandemic, with a focus on containing public debt. The support in response to COVID-19 was notably less than that of emerging market (EM) and regional peers. The authorities have increased resources for health, social (non-contributory) pensions for the elderly, Pemex, and public investment projects, but have restrained spending in other areas.

They have sought to tackle tax evasion, which is welcome. Despite the historic downturn last year, these efforts have boosted revenues and the authorities plan to deepen them going forward. They are simplifying the tax regime for small and medium-sized enterprises and the self-employed.

While the government is not projecting additional revenues from this measure, multiplicity of tax regimes can incentivize tax planning, deter business growth (through scale or threshold effects), and be complicated to administer (owing to the co-existence of cash and accrual basis regimes); therefore, careful attention to design is warranted.

A more accommodative fiscal stance in 2022 could have significant social and economic payoffs. Mexico has some fiscal space and enjoys comfortable market access that could be deployed to limit the human costs (IMF Fiscal Monitor, April 2021 and IMF WP 21/181). Specifically, a permanent increase in spending of about 1½ percent of GDP in 2022 could help alleviate the pressures on the vulnerable, mitigate scarring, and secure the recovery.

Around ¾ percent of GDP would go toward increasing education and health spending (particularly since education losses from nearly 1½ years of school closures have been magnified in under-served areas), about ½ percent of GDP could go toward strengthening poverty reduction efforts (including for childcare benefits), and ¼ percent of GDP could be for incremental public investment in green infrastructure. These measures could be followed by a further, permanent increase in spending of 1½ percent of GDP in 2023-24.