The Economic Consequences of Weakening of the T-MEC

The weakening of the T-MEC would have significant economic repercussions for Mexico and might severely reduce its development potential over the next decades.

The Economic Consequences of Weakening of the T-MEC
The uncertainty caused by some public policy decisions is making the business environment worse and worse. Photo by Jorge Fern√°ndez Salas / Unsplash

The Mexican Institute of Finance Executives (IMEF) warned today that weakening the T-MEC would have big effects on Mexico's economy and could make it much harder for the country to grow over the next few decades.

The possibility of increasing trade disagreements with the United States and Canada within the framework of the treaty known as TMEC generates a special concern now that the consultations requested by our trade partners have begun, after several government actions that contravene what was agreed in the treaty.

The business environment in the country has continued to deteriorate due to the concern generated by "some" public policy decisions that, instead of favoring the harmonious participation of the country's economic forces, create obstacles, complications, and uncertainty, added the IMEF about the changes in the energy legislation promoted by the current administration without mentioning it.

In a press release, the organization under the presidency of Alejandro Hernandez Bringas presented an overview of the current national and international economic and political situation as well as the results of the IMEF Survey for June, July, and August 2022.

The Mexican Institute of Finance Executives Survey

The paper began, "The confluence of numerous high-impact factors makes for an economic landscape that is difficult to understand and even more difficult to forecast."

The global economy in general, and that of several highly influential countries in particular, faces an adverse environment in which anachronistic geopolitical interests are undermining international cooperation while inflation has re-emerged as the main threat to the functioning of the economy and financial markets.

It talked about how central banks were slow to take anti-inflationary steps, how the international economy was getting worse, and how the Gross Domestic Product (GDP) of several countries, including the U.S., was going down, which is why bank policies are expected to get tighter.

The war between Russia and Ukraine has caused an energy crisis in Europe. This crisis will cause inflation, which will cause banks to tighten their monetary policy.

As winter arrives without Russian gas supplies to Europe, the rise in fuel prices would have a greater inflationary impact, so the monetary policy would have to be tightened much more than expected, causing short-term effects on economic activity and increasing the possibility of a recession.

A Review of the Economic Development of Mexico

As for Mexico, it noted: "The economy looks stagnant in the most recent indicators, while inflation has reached levels not seen in two decades, even though the Bank of Mexico is doing its job by raising the benchmark interest rate firmly, after starting late like other central banks."

A point of concern for the climate of confidence is the recent announcement by the President of the Republic that the National Guard will come under the Ministry of National Defense.

Decisions such as transferring the administrative control of the National Guard to the National Defense Secretariat using a decree that goes beyond the established constitutional channels undermine the rule of law, the cornerstone on which society rests, reducing confidence and hurting the prospects for economic growth.

It is necessary to insist that, despite this adverse scenario, Mexico has the opportunity to generate more robust economic activity to achieve the welfare of the population, but this requires adjusting the country's vision and strategy by strengthening economic integration with its main trading partners.

Unfavorable outlook

According to a study by the Institute's National Economic Studies Committee, the outlook for Mexico is getting worse, but there are still some small bright spots. The overall picture is still complicated and not good.

According to the survey, the GDP growth forecast for 2022 has been revised slightly higher, from 1.8 to 1.9 percent, owing primarily to better-than-expected second-quarter GDP figures.

The rate of inflation has been changed from 7.7 percent to 7.9 percent because recent numbers have been better than expected. Thus, for 2023, IMEF sees a highly uncertain and complicated outlook.

"Which in our survey shows a sensitive deterioration in the GDP growth forecast, from 1.8% to 1.4%. It should be noted that rates below 2% are not enough to adequately meet the needs of our population," it clarified.

Regarding the anticipated inflation for next year, the Institute estimates that it will increase from 4.5 to 4.7 percent, which, despite continuing to mark a significant reduction concerning the 2022 estimate, represents a result that is too high compared to the official target of 3.0 percent.