Risks of unexpected economic growth

Recovery of The Mexican Economy It is better than expected after the pandemic. The first half of the year has brought indicators that create a more positive outlook for the rest of the year, with economic growth above 3.0% than forecast at the start of the year; The unemployment rate remains very low and consumption is strong, with general inflation in sharp decline Consumers As for the producers. However, one needs to be cautious with the signals as one may be on the threshold of overheating the economy, which will put an end to the progress.

A surplus economy is one that has recorded very rapid growth in a short period of time, which combined with a below-average unemployment rate leads to imbalances and persistent risks.

One of the immediate dangers of economic overheating is inflation, as sustained growth can create greater demand for goods and services, which in turn raises prices. If this dynamic is not controlled, it will reduce the purchasing power of citizens and lead to a spiral of inflation that will disrupt markets, adversely affect savings and investments, and our country’s economic history is replete with these problems.

After episodes of high inflation caused by the international situation, the general level of prices has started to return to the target (yet not reaching it). However, the persistence of sub-inflation at 6.64% in July is a sobering factor. The increase in interest rates is aimed at curbing inflationary expectations and curbing excessive spending, but external and internal pressures appear to be challenging these efforts. Higher temperatures could reverse low-inflation trends and affect lower-income groups, which are still hit by higher food prices.

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Other risks from overheating are the creation of asset bubbles, particularly systemically disruptive finance, and imbalances in the trade balance and public finances. Rapid increase in domestic demand leads to imports and trade deficit. Likewise, temporary tax revenues from growth can lead to excessive public spending policies, which may be unsustainable if unproductive spending continues, leading to high debt in the long run and the need to implement austerity measures that have a negative impact on society.

Prudent and balanced management of this unexpected growth is essential to avoid the risks of an economic warming scenario. Policymakers should consider a mix of fiscal policies that encourage investment in productivity-enhancing sectors. In addition, it is necessary to maintain a firm dialogue with trading partners to avoid currency fluctuations and guarantee the competitiveness of Mexican exports.

Mexico’s remarkable economic growth, low unemployment, exchange rate appreciation and still high core inflation have combined to create a unique set of challenges. Navigating this landscape requires a delicate balance between supporting growth and mitigating potential instabilities. How Mexico handles this moment will shape its economic trajectory and pave the way for sustainable prosperity for years to come.

Chairman of International Consultants, SC

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