Economics: Data pointing to an economic precipice

MEXICO - Report 01 Jun 2020 by Mauricio González and Francisco González

The GDP report for the first quarter confirmed fears that the recession in Mexico had started to accelerate, a shift that economic readings for the first two months of the year had already begun to anticipate, including especially significantly lagging ones corresponding to January (the coincident index), February (IGAE, private consumption sales, etc.), and March (retail and wholesale activity). But more recent data and the projected impact of measures intended to stop the spread of the COVID-19 pandemic suggest that the 1Q20 GDP results are far from reflecting the sort of steep plunge in activity we can expect for the remainder of the current year.

With the additional pressure of a considerable number of companies' temporarily closing their operations, the industrial sector accelerated the clearly negative trend it embarked on since the beginning of this year by contracting an annual 4.9% in March, its worst fall since the 2009 recession. The manufacturing and construction sectors were pummeled once again with setbacks in the high single digits, but the drop in transportation equipment output was 21.1%. That latter number was just a small taste of the economic carnage to come according to preliminary April results from the automotive vehicle industry that showed the number of vehicles produced was down 98.8%.

The economic situation grows more complicated not only because of the considerable surge in joblessness, underemployment and labor informality, but also due to the extent to which household buying power was crimped in April and May given that the prices of basic goods significantly outpaced headline inflation.

Mexico now faces major challenges on multiple fronts. Deceptively positive 1Q public finance results will almost assuredly give way to budgetary problems. Furthermore, Banco de México warned of the heightened difficulty of making economic forecasts during the pandemic and opted for three scenarios for 2020 and 2021. And with inflation having risen in the first half of May in what may prove an initial response to the persistent depreciation of the peso and possible disruptions to supply chains and distribution of some goods and services, the monetary authority concluded the balance of risks for inflation remains uncertain.

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