Mexico's economy tanks by most on record in second quarter

Jul 31, 2020

 

Mexican Andres Manuel Lopez Obrador has downplayed the use of face masks even as his finance minister said they were key to a successful economic reopening [File: Alejandro Cegarra/Bloomberg]

Mexican Andres Manuel Lopez Obrador has downplayed the use of face masks even as his finance minister said they were key to a successful economic reopening [File: Alejandro Cegarra/Bloomberg]

by  Michael O'Boyle • Bloomberg

Mexico’s economy sank the most on record in the second quarter, as a haphazard national response to the coronavirus pandemic hurt jobs and output while failing to slow the outbreak, posing a dire challenge to President Andres Manuel Lopez Obrador.

Gross domestic product in the three months through June fell 17.3% compared to the previous quarter, according to preliminary data. The result, the biggest quarterly slump going back to 1993, came in slightly worse than the median estimate for a 17% drop from economists surveyed by Bloomberg.

On an annual, non-seasonally adjusted basis, GDP declined 18.9% during the quarter, the national statistics institute reported on its website Thursday, compared to a forecast of a 19.4% drop.

Latin America’s second-largest economy is expected to shrink close to 10% this year, representing its deepest recession since the Great Depression in 1932, according to analysts. Their forecasts have grown bleaker as Mexico continues to post records in new Covid-19 cases, putting the country on track to overtake the U.K. to have the world’s third-highest death toll.

“The worst has passed, our strategy worked and we are already improving,” Lopez Obrador said at his morning press conference on Thursday, pointing to a slower pace of job losses in July and saying he was optimistic about the third-quarter recovery.

However, Jessica Roldan, an economist at Mexican brokerage Finamex, said signs of fresh outbreaks as the economy tries to reopen suggested that Mexico may not see a significant drop in the pace of new virus cases until October.

“If the outbreak is not controlled, the hope for a robust recovery is totally off the table,” Roldan said. She said Mexico will take seven years to get back to GDP levels seen before the crash, with risks for an even longer recovery if the government further alienates investors with its policy decisions.

Lopez Obrador’s refusal to fund major stimulus to support companies, combined with the government’s response to the coronavirus outbreak, will consign Mexico to the slowest recovery among Latin America’s economies, according to Carlos Serrano, chief economist at BBVA in Mexico City.

While data on Thursday showed the U.S. economy recoiled at an annualized pace of 32.9%, Mexico’s collapse was a much steeper 53.2%, despite the fact that both countries shut down, Serrano said. “Why? The U.S. had a counter cyclical policy while Mexico had none.”

What Our Economist Says

The sharp drop in the second quarter GDP was mainly due to transitory headwinds from the outbreak and lockdown measures, but the scope and magnitude imply it is likely to have lasting effects. It is also consistent with government policies providing little relief and actions adding some headwinds.

The GDP number supports concerns about the economic growth and fiscal outlooks. The result was much worse than anticipated by the central bank in its quarterly June report. It implies a wider than officially projected negative output gap and downside risks to inflation forecasts. It also supports expectations for the central bank to provide additional monetary accommodation, while maintaining its cautious tone.

-Felipe Hernandez, Latin America economist, Bloomberg Economics

Lopez Obrador has downplayed the use of face masks even as his finance minister said they were key to a successful reopening. Over the past weekend, officials said that there may be tens of thousands unrecorded deaths from the virus.

Services Sector

Thursday’s data showed the service sectors including commercial activity, transportation, financial and media shrank 14.5% from the previous three months, according to the preliminary data. Industrial sectors, including mining, construction and manufacturing contracted 23.6% compared to the prior quarter, while agriculture, livestock and fishing industries fell 2.5%.

Mexico posted its biggest ever trade surplus in June as U.S. demand, especially for food items, rebounded but anemic non-oil imports showed that internal demand is recovering at a crawl.

Lopez Obrador said Thursday that the country was on track to only lose 4,000 formal jobs in July after the economy shed over 1.1 million posts from March to June. He touted the government’s social programs and added that, just because GDP shrinks, it doesn’t mean poverty will rise.

But earlier this month, Deputy Central Bank Governor Jonathan Heath said there were over 34 million people in need of work, using a wider measure, while academics estimated that 16 million Mexicans may have fallen into extreme poverty between February and May.

The April-June result marks the fifth consecutive quarterly GDP decline for Mexico, derailing Lopez Obrador’s pledge to lift growth to 4% per year under his government. Policy decisions, including the cancellation of a $13 billion airport project, helped damage business confidence and trigger a reduction in investment and capital flight abroad.

Concerns over the economy hit Lopez Obrador’s popularity, with his approval rating dropping to its lowest point since he took office, according to one poll earlier this month.

Julio Ruiz, an economist at Itau BBA in Mexico City, said subsequent policy moves this year have further deepened uncertainty. Still more changes are on the horizon: Lopez Obrador on Wednesday said in the second half of his term he may seek to alter energy laws that have attracted billions in investment.

“They continue to announce policies that generate uncertainty and that could curb the recovery a lot,” Ruiz said, adding that he was set to revise down his estimate for a 9% drop this year after the data.

The post about “Mexico's economy tanks by most on record in second quarter" first appeared on the Al Jazeera website.

***

To engage in the latest trends, developments, and opportunities regarding urban sustainability, social, economic, environmental impact across Australia and Latin America, join our community at Sustainable Cities Group. 

Not yet a member? Get connected and be inspired by more incredible Latin American and Australian professionals. Join the growing Somos21 Community.


Other news

Cookies help us deliver our services. By using our services, you agree to our use of cookies.