Economics: Recalculating for oil and Covid-19
Mexico has experienced five economic contractions over the past four decades including the slippage seen in 2019, but while the first four of these recessionary episodes led to a recovery the following year, it will be a very different story this time around. Even before the pandemic and oil war emerged, Mexico’s 2020 economic situation was looking complicated, with growth estimates running near zero; but in light of depressed oil prices, the global Covid-19 pandemic and problems closer to home we are now projecting GDP will contract by around 5% this year. The federal government has begun to update its own estimates with the April 1 release of its pre-criteria through 2021, but we think officials adopted too-optimistic forecasts, with their 2020 GDP growth scenario ranging between -3.9% and 0.1%.
Our GDP projection assumes reductions in consumption, exports, fixed asset investment and wage mass as well as the impact of greatly weaker oil prices. One of Covid–19’s most pronounced effects is expected at the level of consumption, which we estimate to flag 7.3%. As this aspect of the economy accounts for 60% of GDP, the consumption effect alone could take 4% off Mexico’s GDP. The drop in consumption we expect during the second quarter will be aggravated by the extent to which social distancing measures drastically restrict household expenditures to the most basic foods, services and transportation, with the Mexican basic basket shrinking to a mere 40% of pre-crisis levels. We may witness an initial move toward a normalization of personal consumption in the third quarter, and a rebound in the fourth quarter.
Exports are likely to decrease 4% in response to falling economic activity in the US and the rest of the world, but that is likely to be accompanied by an even sharper reduction in imports so that the net effect would allow for a slight increase in the overall balance of trade (0.6%).
We expect the combined impact of falling consumption and exports during 2020 to provoke a contraction of internal and external demand, followed by a weak recovery in 2021.
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