Latin America Advisor

A Daily Publication of The Dialogue

Has Mexico Gotten Through the Worst of Its Recession?

A woman inspects cars in a Mexico factory. Exports of automotive products rebounded 188 percent from the previous quarter, but overall economic growth rates have started to moderate, Alfredo Coutiño writes below. // File Photo: Mexican Government.

Mexico’s economy grew 12 percent in the third quarter, according to national statistics agency INEGI, following a historic decline of 17.1 percent in the second quarter amid strict lockdowns due to the Covid-19 pandemic. What accounts for the increase in Mexico’s GDP during the third quarter? Is the worst over for Mexico’s economy? How well has the Mexican government handled the economic fallout from the pandemic as compared to others in Latin America, and what should it do to help maintain growth?

Pamela Starr, senior advisor to Monarch Global Strategies and professor of international relations and public diplomacy at the University of Southern California: “It is important not to be distracted by the ‘recovery’ in the Mexican economy suggested by the strong growth and job creation numbers for the third quarter. These numbers are relative to the second quarter, when a pandemic shutdown rocked the economy, not compared with conditions a year ago. The Mexican economy is still on track to shrink by about 10 percent this year and to recover slowly in the ensuing years. The Mexican recovery will not be ‘V-shaped,’ but instead appears to be developing into a ‘curb’ recovery with a strong but incomplete recovery in the third quarter followed by a flattening of growth thereafter. This likely performance in the Mexican economy reflects a number of factors, but one of the most important is the government’s refusal to implement a stimulus that might have helped cushion the pandemic’s impact on small and medium-sized businesses or the newly unemployed. As a result, Mexico has lost thousands of firms, is expected to see an additional 10 million of its citizens fall into poverty and is on the way to losing a large segment of a new middle class that had developed in recent decades. Unfortunately, there is no indication that the López Obrador government will alter its policy course and thereby mitigate the economic costs of Covid-19.”

Alfredo Coutiño, director for Latin America at Moody’s Analytics: “Mexico’s economic rebound in the third quarter is not, and should not be, a surprise, as it was largely expected as the result of the reactivation of businesses after the lockdown. Growth was mainly propelled by the recovery of external demand, mainly U.S. demand for Mexican products, and to a lesser extent due to the reactivation of the domestic market. The main driver was exports, which reported a rebound of 50 percent from the second to third quarter. Among exports, manufacturing products increased 55 percent, with exports of automotive products rebounding 188 percent from the previous quarter. Automotive products are mostly bound for the U.S. market given the close relationship of the auto industries in both countries. Another external factor was remittances from Mexican workers in the United States, which constitute an important driver of household consumption. On the domestic side, consumption also benefited from cash transfers from the government to vulnerable groups. Even though the economy has left recession behind, growth rates started to moderate significantly and will continue to moderate through the fourth quarter. The worst of the contraction seems to be over, but there are still some risks ahead, as in the case of a second wave of Covid-19 and the uncertainty surrounding the government’s anti-market policies. As compared with its Latin American peers, Mexico has done less well than Brazil, Chile and Colombia, countries that are performing better and reporting milder contractions. Mexico’s main economic problem continues to be anemic investment. With an anti-private attitude, the government will not be able to restore investment and will consequently condemn the country to mediocre economic growth and deteriorating social well-being. Restoring credibility and confidence is essential to create a positive environment for sustained economic performance.”

Juan Carlos Hartasánchez, senior advisor at Albright Stonebridge Group: “After a disastrous second trimester, the Mexican economy showed a strong recovery as restrictions eased throughout the country and economic activities resumed. The economy grew 12 percent in the third quarter, driven by a 22 percent increase in the secondary sector, which includes activity from the ‘maquiladoras.’ Indeed, non-oil exports have seen a V-shape recovery and are back to pre-pandemic levels. Despite the good results in the third quarter, there are concerning trends that point to an unbalanced recovery and deceleration. First, growth in the tertiary sector, which includes services and commercial activity, expanded only 8.6 percent in the third quarter, affected by a modest recovery in consumer confidence and unemployment. Second, economic activity across all sectors has reduced the rate of recovery; the Global Indicator of Economic Activity (IGAE) grew 1.1 percent month-to-month in August, down from 8.9 percent in June. Finally, the recent rebound of Covid-19 cases in Europe, the United States and some states in Mexico, including border states and Mexico City, will further contract aggregate demand. Notwithstanding these concerning trends, it is unlikely that Mexico will again experience the economic contraction of April and May. Local governments, which ultimately decide whether to shut down economic activities, are loath to apply draconian measures to contain infections. But unfortunately, looser restrictions will translate into higher Covid-19 cases and extend economic and social hardship. Mexico will stand out as one of the most affected countries by the pandemic, with more than 100,000 lives lost, and a GDP contraction of no less than 9 percent by the end of the year.”

Alicia Girón, researcher at the Institute of Economic Investigations at the National Autonomous University of Mexico (UNAM): “Forecasts for the Mexican economy for early 2021, in an environment of a strong global recession, will be very worrying for several reasons. First, Mexico over the last decade has had low interest rates and growing indebtedness of nonfinancial corporations as well as of sovereign countries at an international level. Second, Mexico’s economic growth has not been accompanied by economic development, but rather by unstable growth, as indicated by macroeconomic data from 2019. Third, without strong growth due to the government’s economic policies as well as the attempt to return to an economic model of nonrenewable energies and the cancellation or halting of works, an environment of risk for foreign and private investors was created. Fourth, the U.S. government’s back-and-forth on NAFTA and its exit from the TPP is a blow to sectors integrated into the North American economy. Fifth, even with the new USMCA, the deal did not guarantee an economic take-off, given coronavirus-related closures of businesses and borders. Sixth, the decline of 8 percent in the first quarter hardly augurs positive growth at least for the remainder of the year. Seventh, the recent slow growth does not yet reflect increasing unemployment and closure of businesses. Eighth, the impact will be reflected in expired portfolios of commercial banks and in the consumer credit cards business. Ninth is the mismanagement of the pandemic; there are no preventive measures, hospitals are once again full, and deaths continue to rise. Mexico can resume sustained and sustainable economic growth by starting a health campaign, preventing diseases such as diabetes and hypertension through public policy, strong investment in education, the expansion of public infrastructure for access to water and closing the digital gap in order for marginalized communities to achieve better opportunities and to comply with the Sustainable Development Goals of the 2020 Development Agenda.”

Joan Domene, senior economist at Oxford Economics: “Gradual easing of restrictions domestically and abroad allowed for a steady recovery of the industrial sector, while capacity constraints and social distancing will continue to weigh on activity. We expect an additional recovery in the fourth quarter and next year, but risks remain tilted to the downside as the incipient Covid-19 second wave could halt or even revert the reopening process. The composition and structural weaknesses of the Mexican economy made it especially susceptible to the pandemic shock despite imposition of softer restrictions than the regional average. Moreover, the lack of economic stimulus from the government due to AMLO’s counterproductive austerity will prevent a speedy recovery to pre-pandemic levels.”

Adrian Gay Lasa, partner at Holland & Knight: "According to INEGI, during the third quarter of 2020, Mexico has shown signs of recovery with growth of 12 percent, due mainly to the gradual reactivation of activities in the country. The main triggers for this growth were important increases (22 percent) in secondary activities (industrial, construction, manufacture, electricity and mining); (8.6 percent) in tertiary activities (commerce and services), and (7.4 percent) sustained increase in primary activities (agriculture, cattle raising and forest exploitation). Even though Mexico has shown signs of improvement and recovery, it is still far from reaching pre-Covid levels of prosperity. If a resurgence of the pandemic occurs, as it has in European countries, Mexico’s economic gains will be lost. There are many different opinions with respect to how the Mexican government has handled the economic fallout from the pandemic. The most criticized aspects have been the lack of tax-related incentives to reactivate the economy, insufficient support for micro, small and medium-sized businesses, and that federal infrastructure projects such as Tren Maya, Santa Lucía’s Airport and the Dos Bocas Refinery continue (instead of using resources to fund Covid-related incentives). To maintain growth, Mexico needs to implement relevant tax incentive plans and support local businesses and the tourism industry. However, this will be a challenge if a second wave of the pandemic occurs in the following months. Policies to avoid human interactions by limiting public spaces have been well implemented and are expected to continue."

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