Mexico’s economy takes historic plunge

Mexico’s economy contracted the most on record after the majority of activity was shut down to prevent the spread of the coronavirus.

The nation’s IGAE economic indicator, a proxy for gross domestic product, fell 19.9% in April from a year earlier, the nation’s statistics institute reported on Friday, June 26th. That compares with a 22% median forecast from economists and is almost double the previous record 11% drop registered during the global financial crisis in 2009.

Latin America’s second-largest economy, which has had several economic crises and currency devaluations in its history, is facing its worst recession since the 1930s. Mexico has been among the countries hardest hit by the coronavirus pandemic due to the fall in trade with the U.S. and the crash in oil prices, while more than 12 million citizens lost or were suspended from their jobs in April. The data is consistent with the view that Mexico’s economy will shrink 10% or more this year, said Carlos Capistran, an economist at Bank of America in New York.

“It is not only the result of COVID-19 and the lockdown, but the lack of vigorous policies to help the economy,” Capistran said. “The latter and a virus that is still on the loose in Mexico will continue to keep economic activity in contraction territory for many more months. However, despite the large contraction in activity, inflation is above Banxico’s target,” which limits the central bank’s room to cut its interest rate further.

Cozumel (File photo)

The central bank cut borrowing costs to the lowest level in almost four years on Thursday. Mexico’s economy will shrink 10.5% this year, more than peers such as Brazil, Russia, South Africa and India, according to the International Monetary Fund.

A separate report showed that Mexico had a $3.5 billion trade deficit in May, surprising economists who expected the nation to swing back to a $1.3 billion surplus, based on the median forecast of a Bloomberg survey.

Exports fell roughly 57% and imports tumbled 47% from a year earlier, following drops of 41% and 31%, respectively, in April, indicating a continued collapse in trade. Automotive exports plunged 90%, leading a decline in manufacturing as plants halted production and U.S. demand crumbled.

“On the import side, it was mostly a sharper decline in imports of intermediate goods that explained most of the sharper contraction,” said Felipe Hernandez, a Latin America economist at Bloomberg Economics. “The result is consistent with weaker manufacturing activity in Mexico.”

Source: Bloomberg

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