Mexico’s economy contracted 17.3 per cent in the second quarter compared with the previous three months, putting it on course to be one of the biggest emerging market casualties of the coronavirus pandemic.
It is the fifth quarterly contraction in a row, dampening hopes of a speedy, V-shaped recovery. Compared with the same period last year, the decline was 18.9 per cent, the biggest drop on record, according to preliminary data from the state statistics office Inegi.
“This is a horrendous number, but hardly a surprise,” Andrés Abadía at Pantheon Macroeconomics wrote in a note.
Although green shoots were now emerging, he added: “The deterioration of the labour market has been severe and the pandemic is far from controlled.”
The second-quarter result was similar to market expectations. The May economic activity index (IGAE), a GDP proxy, last week showed that “even with a relaxation of confinement measures . . . the economy still worsened”, HR Ratings said.
President Andrés Manuel López Obrador maintained that the economy has now touched bottom. “The worst is behind us. Our strategy has worked. Now we are recovering,” he told his daily news conference on Thursday.
But Mexico appears on course for its worst recession in a century, with the IMF predicting a 10.5 per cent contraction this year. Some analysts forecast a drop of as much as 12 per cent.
Gerardo Esquivel, a Bank of Mexico board member, said in an article that 2020 GDP could fall by as much as 10.5 per cent, which implies that “we will not recover levels of production we had before the pandemic until 2022”.
Complicating the picture is the fact that Mexico was in recession even before coronavirus struck. Last year, GDP fell 0.3 per cent from 2018.
“We estimate it will take until the end of 2024 to get back to the level of GDP we had at the end of 2019,” said Carlos Serrano, chief economist at BBVA in Mexico City.
The labour market has taken a severe hit, with more than 12m Mexicans, largely in the informal sector, having lost their jobs and incomes since coronavirus struck. That is expected to keep a lid on private spending.
According to Coneval, the state agency measuring poverty, 55 per cent of workers did not earn enough in May to cover a basic basket of food, a dramatic rise from 36 per cent in the first quarter.
“We certainly do not share the optimism of a V-shaped recovery, particularly given the conservative/hawkish monetary stance and the timid and poorly targeted fiscal stimulus,” said Alberto Ramos at Goldman Sachs.
Throughout the pandemic, Mexico has refused to take on debt or offer broad aid, beyond very small loans for micro businesses. It has confirmed 408,449 infections and 45,361 deaths to date, though officials acknowledge the true figures are several times higher.
“Mexico will come out of the crisis far worse than most other countries,” Capital Economics said in a note to clients.
The finance ministry is due to present its 2021 budget on next month as the government fights to stave off the loss of its sovereign investment-grade rating as the outlook worsens.
Gabriela Siller, head of economic and financial research at Banco Base, said there was a “nearly 90 per cent” chance that there would be a ratings downgrade by the end of 2020 or early next year.