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The World Bank estimates that economic growth in Mexico will be 3.2% this year, above the Latin American average

by | Oct 28, 2023

The organization emphasizes that despite its proximity to the United States, economic growth in Mexico has seen a limited boost in foreign direct investment due to ‘nearshoring.’

Economic growth in Mexico is projected to be 3.2% in 2023, above the 2% expected for the Latin American region on average, the World Bank recently reported. Despite the solid macroeconomic management of the region, including measures to contain the level of debt, growth prospects remain at a  relatively low level, the multilateral agency expressed in its most recent Economic Report Latin America and the Caribbean. Additionally, the entity estimates growth of Mexico’s Gross Domestic Product (GDP) will be 2.5% for 2024 and 2% for 2025.

Certain factors affect Mexico’s ability to capture FDI

Latin American governments have not done enough to address “structural” issues that drive growth, the Bank’s economists wrote, and an example of this is Mexico. “In the last five years even, Mexico experienced minor increases in FDI (foreign direct investment) flows, despite its obvious proximity to the United States.” Although salaries in Latin America’s second-largest economy are competitive in relation to China, factors such as taxes, cost of capital, limited educational level of the workforce, challenged infrastructure policies, and social factors affect the attractiveness of the country as a destination for the nearshoring, the tendency of companies to leave Asia to locate closer to their target market.

This not only applies to economic growth in Mexico but to other countries in the region. “Regional growth continues to be hampered by the low level of capital accumulation and productivity growth. Despite the increase in foreign direct investment in Argentina and Brazil observed last year, there is little recent evidence to demonstrate that the region is taking full advantage of the realignment of global value chains,” the report says.

While at the regional level, the level of business confidence decreased this year compared to its peak in 2021, it remained strong in Brazil, Costa Rica, and Mexico. “These indicators, added to an increase in the cost of financing and concerns regarding the global economy, point to a moderation in consumption and a persistently low level of investment in Chile and Colombia,” wrote the Bank’s specialists.

As a component of economic growth, Mexico is the main recipient of remittances sent by compatriots abroad in the entire region, receiving 42% of the region’s total and the second in the world, after only India. The Bank estimates that Latin America received $146 billion in remittances in 2022, “becoming one of the main recipients of these flows in the world, surpassed only by South Asia among emerging markets,” the report states.

Economic Growth in Mexico is powered by multilateral trade accords

One of the pivotal factors fueling economic growth in Mexico is its strategic participation in international trade agreements. The North American Free Trade Agreement (NAFTA), and its successor, the United States-Mexico-Canada Agreement (USMCA), have been instrumental in expanding Mexico’s trade horizons. These agreements have effectively created a massive regional market encompassing over 490 million consumers. The accords provide Mexican exporters with access to the world’s largest economy, the United States, as well as neighboring Canada. This preferential access has stimulated the country’s exports, particularly in the manufacturing sector, driving economic growth in Mexico by boosting production and employment opportunities.

The main drivers of Mexican economic expansion are outlined below:

Manufacturing and Exports

Mexico’s manufacturing industry plays a significant role in its economic development. Sectors such as automotive, electronics, and aerospace have flourished, driven by Mexico’s proximity to the United States and its cost-effective labor force. Multinational corporations have established a strong presence in Mexico to take advantage of these favorable conditions, investing in production facilities and supply chain integration. This, in turn, fosters export-oriented growth, as Mexican-made goods are shipped worldwide. Mexico is now one of the world’s top exporters of automobiles and electronic products, and the manufacturing sector is a crucial driver of the country’s economic growth.

Foreign Direct Investment (FDI)

Foreign Direct Investment (FDI) has been a catalyst for economic growth in Mexico. The nation’s appeal to foreign investors is multifaceted, encompassing factors such as its strategic location, access to global markets, and a skilled labor force. FDI inflows have not only provided a much-needed capital injection but also contributed to technology transfer, job creation, and the expansion of production capabilities. Furthermore, as foreign investors establish and expand their operations in Mexico, the local supply chain benefits, boosting the broader economy.

Demographics and Human Capital

Mexico’s demographic profile presents both opportunities and challenges for economic growth. With a large and relatively young population, there is the potential for a demographic dividend, as this labor force can drive productivity and economic expansion. However, for this dividend to be fully realized, it is essential that the workforce is well-educated and equipped with the necessary skills. Investment in education and vocational training is crucial for unlocking the potential of Mexico’s youth, enhancing their employability, and fostering innovation.

Macroeconomic Stability

Maintaining macroeconomic stability is a prerequisite for economic growth. A stable environment characterized by low inflation, consistent exchange rates, and sound fiscal policies is crucial for businesses and investors to plan, invest, and operate confidently. Mexico has made substantial progress in this regard, bolstering its economic resilience and attracting investments that promote growth.

Infrastructure Development

Investments in infrastructure are fundamental for unlocking Mexico’s economic potential. Transportation, telecommunications, and energy are critical areas where improvements can enhance productivity and create economic opportunities. Modernizing and expanding transportation networks can reduce logistics costs and improve trade efficiency. Similarly, an upgraded telecommunications infrastructure supports connectivity, while a reliable energy supply is vital for powering industries and businesses.

Mexican economic growth factors are intricate

Economic growth in Mexico is driven by a complex interplay of factors. Trade agreements, particularly NAFTA and USMCA, have opened doors to international markets, while Mexico’s manufacturing prowess and export-oriented industries have propelled economic expansion. Foreign direct investment and a favorable demographic profile have furthered the country’s growth potential. Macroeconomic stability, human capital development, and infrastructure enhancements that have been made in recent years have all contributed to the Mexican economic growth story.

Contact LATAM FDI to discuss your foreign direct investment plans in Latin America.

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