07:21 AM EDT, 10/09/2024 (MT Newswires) -- The slowdown of Mexico's economy in recent quarters was mainly caused by the significant drag from net exports as real exports have declined while imports have continued to grow in line with domestic demand, said Societe Generale.

The decline in real exports came at a time when the major market for Mexican exports -- the United States -- was and still is growing at a decent pace. The bank's explanation for this is that real exchange rate appreciation and rising unit labor cost in 2022-23, at a time when the Chinese economy and the rest of developing Asia were restoring their production and trade, resulted in a loss of competitiveness for Mexican exports and the affected manufacturing sectors.

In April this year, the Mexican government responded by imposing tariffs of 5%-50% on competing manufacturing imports for two years. Together with the peso's depreciation, these policies should be able to resurrect Mexico's real exports to some extent over the coming quarters, stated SocGen.

Nevertheless, it isn't clear how the lack of labor market competitiveness caused by rising wages can be bridged, particularly given the long-term bottlenecks to productivity growth, wrote the bank in a note to clients. The lack of competitiveness doesn't automatically nullify the structural nearshoring theme but still shows the limitations of how and when nearshoring can work most effectively.

Meanwhile, in the near term, Mexico's real exports must improve to save investment from collapsing, added SocGen.