Mexico’s economic contraction clouds pandemic recovery

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A sudden drop in Mexico’s gross domestic product in the third quarter has analysts and investors wondering: how fragile is the country’s recovery?

Growth in many economies – including the United States – slowed in the three months to the end of September as a third wave of Covid-19 cases hit, but Mexico’s estimated 0.2% contraction quarter over quarter announced on Friday was its first since the middle of last year.

At constant prices, the country’s GDP is likely only at 2016 levels and analysts say it faces new risks from supply chain disruptions and policy decisions by President Andrés Manuel’s government. Lopez Obrador.

The peso began to weaken against the dollar on Tuesday, slipping 2% against the greenback through Friday afternoon in New York, falling from 20.1718 pesos to 20.5782 to the dollar. It put the currency on track for its worst week since mid-August and named it one of the worst performing emerging market currencies, with only the South African rand slipping further against the dollar.

Gabriel Yorio, Deputy Minister of Finance, told a press conference that the government is maintaining its growth estimates for 2021 and 2022 and that consumption, investment and employment are almost at pre-war levels. pandemic.

“This figure does not interrupt the path of growth,” he said.

Record remittances and strong exports of manufactured goods are working in Mexico’s favour, with the exception of a sharp decline in the automotive sector. BBVA analysts said the economy could still grow by 6% this year and the negative figure was partly due to a recent labor reform that severely restricted outsourcing.

But the global shortage of semiconductor chips hammering Mexican auto factories, along with an uncertain investment climate and a US slowdown will continue to drag into next year, analysts say.

Private sector leaders say a proposed energy reform would cause irreversible economic damage and make electricity dirtier and more expensive for businesses and consumers if passed.

“What do I see on the horizon? Lots of challenges for Mexico,” said Gabriela Siller, head of financial and economic research at Banco Base.

With inflation now above 6%, the Bank of Mexico has raised interest rates by 25 basis points at each of its last three meetings. Analysts expect another rate hike in November.

JPMorgan analysts said manufacturing headwinds and investment fragility amid misguided policy direction were downside risks.

Uncertainty surrounding nationalist López Obrador’s political plans meant Mexico’s economy was already contracting before the pandemic – with a 0.1% drop in 2019 preceding an 8.5% drop in 2020. Siller estimates that GDP will not fully recover to its 2018 peak levels until 2023, while GDP per capita could take until 2027.

“The big picture is that the recovery will still struggle from here,” said Nikhil Sanghani, emerging markets economist at Capital Economics. “The recovery will be worse than in most other major Latin American economies.”

Additional reporting by Joe Rennison

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