Mexico’s economic contraction clouds pandemic recovery

A sudden drop in Mexican gross home product within the third quarter has analysts and buyers asking: how fragile is the nation’s restoration?

The expansion of many economies — together with the US — slowed within the three months to end-September as a 3rd wave of Covid-19 instances hit, however Mexico’s estimated 0.2 per cent quarter on quarter contraction introduced on Friday was its first because the center of final yr.

At fixed costs, the nation’s GDP might be solely at 2016 ranges and analysts say it faces additional dangers from provide chain disruptions and coverage selections by the federal government of president Andrés Manuel López Obrador.

The peso started to weaken towards the greenback on Tuesday, sliding 2 per cent towards the buck to Friday afternoon in New York, from 20.1718 pesos to twenty.5782 per greenback. It put the forex on the right track for its worst week since mid-August and marked it out as one of many worst-performing rising market currencies, with solely the South African rand sliding additional towards the greenback.

Gabriel Yorio, deputy finance minister, stated at a information convention that the federal government maintained its development estimates for 2021 and 2022 and that consumption, funding and employment have been nearly at pre-pandemic ranges.

“This determine doesn’t interrupt the trail of development,” he stated.

Taking part in in Mexico’s favour are report remittances and powerful manufacturing exports — excluding a pointy drop within the automobile sector. Analysts at BBVA stated the economic system might nonetheless attain 6 per cent development this yr and that the unfavorable quantity was partly pushed by a current labour reform that severely restricted subcontracting.

However the world scarcity of semiconductor chips hammering Mexico’s automobile crops, in addition to an unsure funding local weather and a US slowdown would proceed to pull into subsequent yr, analysts stated.

Non-public sector leaders say a proposed energy reform would do irreversible financial harm and make electrical energy dirtier and dearer for firms and shoppers if handed.

“What do I see on the horizon? Plenty of challenges for Mexico,” stated Gabriela Siller, head of monetary and financial analysis at Banco Base.

With inflation now above 6 per cent, the Financial institution of Mexico has raised rates of interest 25 foundation factors at every of its previous three conferences. Analysts anticipate it to boost charges once more in November.

Analysts at JPMorgan stated manufacturing headwinds and fragile funding amid poor coverage steerage have been draw back dangers.

Uncertainty over nationalist López Obrador’s coverage plans meant Mexico’s economic system was already shrinking earlier than the pandemic — with a 0.1 per cent decline in 2019 previous an 8.5 per cent drop in 2020. Siller estimates that GDP won’t absolutely recuperate to its 2018 peak ranges till 2023, whereas GDP per capita might take till 2027.

“The larger image is that the restoration will nonetheless wrestle from right here,” stated Nikhil Sanghani, rising markets economist at Capital Economics. “The restoration will fare worse than in most different main economies in Latin America.”

Extra reporting by Joe Rennison

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