Economics: A Mexican crisis like no other
Although uncertainty has been the one constant since the beginning of the Covid-19 pandemic, we update the odds of some scenarios given the latest economic data, even as questions surround the pandemic’s future. In the International Monetary Fund’s most recent assessment of the global economic situation, aptly titled “A Crisis Like No Other, An Uncertain Recovery," Mexico stands out both for the depth of the 2020 recession, and the very limited recovery IMF analysts expect from the country.
There is mounting evidence to substantiate such adverse projections. The May IGAE delivered unprecedentedly bad numbers as economic activity tumbled -21.6% yoy, with industrial output and tertiary activity contracting by close to 30% and 20%, respectively. For the first five months of 2020 the monthly GDP proxy shows an accumulated -9.3% yoy decline, numbers that lead us to expect GDP results for the first half of the year to show a drop in output exceeding -10%.
The economic downturn in 2020 is shaping up to be among the worst of recent decades, the severity of which may have no equivalent in Mexico’s modern history. Moreover, its impact may endure much longer than the average 18-month recoveries of the crises of the previous five decades. Supply and demand components will experience differing degrees of improvement, but it may take years for key indicators to return to 2019 levels. In our baseline scenario, it will take four years for GDP and fixed-asset investment to barely break back above pre-crisis levels, with private consumption remaining slightly below that mark through 2024.
There will assuredly be a reaffirming of demand and production during the second half of 2020. However, with roughly the same degree of certainty, we can expect it to prove very modest and to a large extent dependent on a reduction in the three main variables of Covid-19 (infections/active cases/fatalities) that does not look to be on the immediate horizon given the public health strategy’s failure to contain and roll back the pandemic.
Evidence regarding the components of demand and production satisfiers have led us to review the estimates in our macroeconomic framework. The 2020 baseline scenario, to which we assign a 65% probability, would entail a -10.6% fall in GDP as opposed to the -8.9% reduction previously projected.
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