Economics: Recalibrating for Phase 3

MEXICO - Report 20 Apr 2020 by Mauricio González and Francisco González

When Mexico’s labor minister recently appeared at a presidential press conference to announce job losses registered between March 13 and April 6, she couched the news in the government’s particular political perspective. Both the minister and President López Obrador specifically linked the layoffs to the Covid-19 epidemic, while citing a much lower rate of dismissals at micro and small enterprises as an act of heroic resistance, in contrast to the supposedly hard-hearted attitude on the part of at least some medium-sized companies and major corporations. While we don’t intend to begin unpacking those numbers this week, much less try to discern intentions from this small sample of strictly formal sector positions, we can say that this labor market data is just the tip of the iceberg of what has been happening in the broader economy, with much worse to come.

As the prospects for a global economic recovery become less clear and possibly distant, and the initial rebound in crude prices and blip of bullish oil market projections seemed to falter as a massive global glut combined with deeply depressed demand keeps perspectives negative, Mexico’s economic outlook is looking more complicated as well.

Although we will have to wait for updated data regarding multiple variables to get a clearer picture of how conditions are unfolding, it is possible to conduct a sensitivity analysis regarding GDP growth, employment and job pay and benefits, taking as a base assumption a deeper decline in aggregate demand of an additional percent point to the contraction that we anticipated when we published our revised estimates March 31. Under this revised scenario GDP could contract by almost 7%, with every basis point decrease in aggregate demand components delivering direct and indirect effects on the order of 200 basis points, even before we account for the probable contraction in overall wages and benefits paid as companies close their doors, surviving firms pare their payrolls, and job losses mount.

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