Domestic consumption to keep recession at bay in Mexico, J.P. Morgan says

Dec 2 (Reuters) - J.P. Morgan said it does not expect a recession in Mexico in 2023 as resilient domestic demand should help offset negative impact from a "mild U.S. recession" until the end of next year.

Mexican economy is expected to grow 1.8% next year, JPM said in a note dated Dec. 1, albeit slowing from a forecast of 3.1% jump in 2022.

"The labor market remains tight, which, coupled with the government's aggressive minimum wage policy, resulted in broad-based increases in real wages ... We expect this to be the cornerstone of continued growth next year," JPM economists Gabriel Lozano and Steven Palacio said.

Risks to growth stem from inflation, Lozano and Palacio said, adding that they expect headline inflation at 5.1% year-on-year and core inflation at 5.3% by the end of 2023.

Annual headline inflation in Mexico hit 8.14% in the first half of November, official data showed, down from 8.53% a month ago.

While Bank of Mexico, or Banxico as it is commonly known, said on Wednesday inflation likely peaked in the third quarter, signaling that an end could be in sight for its interest rate-hike cycle, JPM says policy may stay restrictive. The key interest rate has been raised by 600 basis points since mid-2021 to 10%.

"To us, Banxico's implicit acknowledgement of the troubling inflation picture is reason enough for it to pursue a tighter policy stance than we thought. We, thus, see the terminal rate at 10.75% by first quarter of next year, with upside risks, and expected it to be unchanged through 2023."

Downside to Mexico's currency is seen being limited by foreign direct investments, JPM said, expecting the peso to end 2023 at 19.75 per dollar, better than an earlier forecast of 20.75 and representing a 3% decline from current levels.

The investment bank warns of growth beginning to wane towards the end of 2023, even as government spending may gain traction ahead of the 2024 presidential election.

"Tighter financial conditions, Europe at a standstill, and China trapped in pandemic woes — are expected to take a toll (on growth) late in 2023 and throughout 2024." (Reporting by Priyadarshini Basu; Editing by Sherry Jacob-Phillips)