Manufacturing sector in Mexico can grow 5% per year thanks to Nearshoring

Mexico’s manufacturing production could grow 5% per year thanks to the boost that nearshoring will give it, according to a report by the firm Deloitte.

The consulting firm explained that Mexico is still at a very early stage in nearshoring, but the phenomenon is evolving rapidly and involves an expansion of manufacturing activities.

The relocation of manufacturing plants in Mexico could reshape the economy through the arrival of foreign investment, new and specialized jobs, according to the company’s most recent report on its economic outlook for the country.

It highlighted that despite the fact that manufacturing activity has slowed lately, it remains well above pre-pandemic levels (6% above 2019).

On the other hand, private investment is recovering rapidly with 18% annual growth in the first half of 2023, “after a long period of weakness.”

In addition to the forecast for the manufacturing sector, Deloitte considered that Mexico’s exports could grow by up to an additional 50 billion dollars a year and that Foreign Direct Investment (FDI) would increase 10% each year.

It projected that all these factors would add 2.9 additional percentage points to the GDP in the next five years.

However, he said that when looking at the volume of FDI in the first half of 2023, of the total of $29.041 billion registered, only 7% corresponds to new investments, while almost 80% corresponds to reinvestments.

“While these numbers call into question whether new companies are moving to Mexico or not, we think this is happening because several of these nearshoring announcements are in their initial phase, and that the largest investment disbursements will occur in the following years,” he explained.

On the other hand, he noted that the construction of industrial facilities in the country grew 19% annually in the first six months of 2023, surpassing the highest level reached in 2017.

More investments to improve productivity

The consultancy referred that while factors such as the current nearshoring situation, higher real wages and the TMEC have boosted Mexico’s growth, the investments needed to improve productivity remain a challenge.

He argued that productivity in Mexico, which measures output per labor hour, has remained virtually unchanged since 2005.

But that trend appears to be changing in the manufacturing sector, where productivity grew 4% in 2022 compared to 2021, and is now 10% above 2005 levels.

“In fact, investment in machinery and equipment, something that increases efficiency and productive capacity, is growing in a way not seen since 2011. In the first half of 2023 it grew 20% over the same period last year,” he noted.

However, he commented that there is still a lack of public and private resources to capitalize on the “Mexican moment”, such as energy, water and natural gas structures, technology centers, skilled labor and greater security, among other factors that, if improved, could boost productivity and improve long-term growth trends.

“And policies that promote stability and ensure the fair application of the law would be essential,” he said.

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