Mexico expecting contraction after first quarter slump

Economic data for April to be released today is likely to show a continuation of a slump in Mexico’s economic

Central Bank of Mexico Mexico City

Photo: Reuters/Edgard Garrido

Economic data for April to be released today is likely to show a continuation of a slump in Mexico’s economic activity; GDP contracted 1.6% in the first quarter. Even as the automotive, construction, and mining sectors of the Mexican economy re-open, future estimates are still grim. Median projections estimate that the economy will shrink by a total of 6.7% over 2020, likely pushing 20 million people into poverty.

Further economic disruptions are likely to hit Latin America’s second largest economy if re-opening the economy leads to a second wave of COVID-19 infections. The government has relied on abstract modelling of the virus’ trajectory rather than testing, raising the possibility the undetected cases range in the hundreds of thousands. As more and more people are tested, Mexico could see a spike in official cases, potentially triggering a government response. Another economic lockdown may push the economy into a deeper downward spiral, outstripping earlier loss projections.

President Andres Manuel Lopez Obrador would likely respond to this outcome with fresh fiscal stimuli for small businesses and infrastructure projects. However, these are likely to be insufficient and comparatively smaller than aid in other developing countries. Similarly, the Bank of Mexico may consider another rate cut down to 4.5%. Fiscal policy notwithstanding, until the Mexican government has a better grip on the scale of the problem, a genuine re-opening seems out of reach.

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