Mexico Cuts Growth Forecast for 2022 as Inflation Spikes

(Bloomberg) -- Mexico's Finance Ministry cut its growth forecast for this year after faster-than-expected inflation led the central bank to hike interest rates despite a stalled economy.

Latin America's second-largest economy will grow 3.4% in 2022, compared to a previous projection of 4.1%, the Finance Ministry wrote in a preliminary budget proposal for next year published Friday. Inflation is expected to slow to 5.5% by the end of the year, according to the proposal, after having reached 7.3% in February.

For 2023, gross domestic product is expected to expand 3.5%, with annual inflation reaching 3.3% by December, the Ministry said in the document.

“The persistent impacts of the pandemic on the imbalance between supply and demand and the escalation of the geopolitical conflict between Russia and Ukraine have obliged countries to adjust their growth expectations,” the ministry wrote in the proposal.

Mexico's economy ground to a halt in the second half of last year, hit by supply chain snarls, weak domestic demand and new Covid-19 variants. President Andres Manuel Lopez Obrador stuck to his austerity plans even at the height of the pandemic in 2020, declining to take on debt to inject fiscal stimulus, which has limited the recovery.

Inflation is hovering near a two-decade high, and Banxico -- as the country's central bank is known -- has increased interest rates in all its meetings since June, partially removing one of the few sources of stimulus for the economy.

The proposed 2023 financial plan sees the government running a primary surplus -- not accounting for interest payments -- equivalent to 0.4% of gross domestic product, having proposed a 0.3% primary deficit in the 2022 budget. It forecasts the public deficit at 2.8%, versus the 3.1% proposed for 2022.

What Bloomberg Economics Says
“Weaker-than-expected activity in 2H 2021 and additional headwinds this year brought our 2022 growth estimate down to 1.8% from 3.0% prior. Our projection implies the negative output gap will narrow, but activity remain below potential and pre-pandemic levels.”
-- Felipe Hernandez, Latin America economists
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The Finance Ministry also sees the Mexican crude basket at $92.9 per barrel in 2022 and $61.1 in 2023, as prices have risen on the back of Russia's invasion of Ukraine. Mexico expects oil output to be 1.82 million barrels per day this year, slightly down from 1.826 million in its September forecast, and 1.85 million in 2023.