Economics: A manufacturing outlook change for the worse
Last week’s updated aggregate supply and demand results for 2019, as well as the few indicators for the first months of 2020 released to date, already provided plenty of evidence that the economy was heading in the wrong direction, long before the Covid-19 pandemic began to cast its shadow. Investment fell as private investors grew more reluctant in response to official policy decisions, the government continued to scale back physical investment while gearing up for its dubious emblematic infrastructure projects, and consumers increasingly shied away from purchasing durables as they took a dimmer view of economic prospects.
Last year’s negative trend in US industrial production weakened demand for Mexican manufactures, although it was the sector that showed the highest dynamism relative to others. However, the future outlook could be further aggravated by the extent to which some key sectors decided to stock up on Mexican inputs while Nafta rules were in effect and the prospects for USMCA ratification were cloudy.
Although the Mexican economy in general has tended to decouple from that of the US in recent years, the bonds between the two economies remain tight in the manufacturing sector given the robust cross-border production chains built up over the past two decades. The expected contraction in US output will weaken Mexican manufacturing, shutting down the only motor driving the economy, and we will see a drop in exports as well as a deepening of the private investment crunch, and a possible contraction in private consumption.
The Covid-19 pandemic will not only impact the Mexican economy through an external channel in the form of falling exports, but also through diminished tourism and reduced remittance flows. It will also affect the domestic market overall as the authorities tighten response measures over the coming weeks at the same time as the oil price war will further complicate the country’s economic situation. Moreover, no one should underestimate the extent to which manufacturing production activity will slow in response to the US downturn now expected.
The magnitude of the coming drop in domestic demand will depend to a large extent on the measures the AMLO government will eventually announce both to mitigate the coronavirus spread, and to reactivate the economy. However, the government has added to uncertainty by its inability to date to announce what those measures might consist of, and it is generally assumed that its yet-to-be announced reactivation strategies will have a very limited effect given the almost null financial margin with which the government is working.
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