The Mexican Economy: A Short or Long Recession Cycle?

Jue, 03/11/2021 - 11:43 -- mpalacios

The trend of the Mexican economy during the last two years has not been positive. INEGI, the official bureau of statistics, has just reported that GDP registered a fall of 8.5 percent compared to 2019 with seasonally adjusted figures. But in 2019 GDP also receded, although in far less measure, less than one percentage point. However, it must be considered that the Mexican economy has been falling for 6 quarters (compared to the previous year). Considering the population growth rate (1.2 percent per year), the fall in the GDP per capita is close to 11 percent. This figure matters because it gives a more accurate idea of the size of the downturn. It is also necessary to take into account the two years, since our interest should be now to try to figure out how long the recession will be the endure, that is, when will Mexico reach the pre-pandemic level of GDP.

The length of the cycle will depend on several factors: the prolongation of the pandemic; the behavior of the world economy; and internal factors. In the first case, uncertainty still prevails: vaccination campaigns are already underway, but they advance at very uneven rates in different countries (and regions of Mexico). This is because the patents, manufacture and provision of reliable vaccines are highly concentrated in a few companies. There are countries that do not yet have a single dose. And, as international health organizations have affirmed, if we are not all safe, no one really will be.

On the other hand, international trade has recovered. The drop was very severe in April 2020 (12 percent); however, considering the full year, there was a growth of 1.3% (according to the Netherlands Bureau for Economic Policy Analysis, available at China was the one who made the big push for world trade, while in North America seems to have occurred a slower recovery.

Regarding investments and the flow of capitals, things do not paint very well, especially for developing countries like Mexico; the most worrying problem lies in the possibility of a financial crisis. The World Bank said in January that during 2020, the rate of public debt in relation to GDP in the emerging and developing economies, increased from 52 to almost 61%. It would be necessary to add the increase in private debt that multiplied by five between 2014 and 2019. A good part of these debts is external, that is, they were contracted in foreign currency. All this indicates that, unless relief measures are taken at the global level, this situation could become a serious problem due to possible moratoriums on payments. If that happens, it does not mind so much the level of indebtedness of this or that country as flight capital, devaluations and shortage of new funding would affect severely those countries which, like Mexico, require currency (dollars) to cover its imports, financial operations, and monetary reserves.

As for the internal factors, we have several problems to overcome. To better understand the matter, it is worth reviewing the different sectors of the economy.

First, the primary sector, grew during 2019 and 2020, particularly in the second half of last year. This indicates that we are far from a food crisis, which is of course good news. It is likely that, in addition, some import substitution took place. The problem is that this sector contributes little to the economy, just 3.5 percent.

On the other hand, secondary activities fell 1.7 percent in 2019 and 10 percent in 2020. The construction industry has declined for 6 quarters in a row. Manufacturing has had a shorter but more intense decline. This can be explained by global disruption, especially in the US economy, as well as the decline in final consumption in Mexico of some non-food products such as clothing and automobiles. A fall in manufacturing affects the wage bill in a special way, since the best average wages in the entire economy are paid in this sector: 1.5 times more than in the service sector.

Finally, tertiary activities (service) had a negative growth rate of 7.7 percent. It must be underlined that service brings 73 percent of employment and more than two thirds of the total product. Some branches of this sector, such as the cultural and sports leisure sectors, fell by 54 percent; and those for temporary accommodation and food and beverage preparation, 44 percent.

As the economy improves, it can be expected that some small companies could find the way out. But some other will probably not, especially those linked to tourism since this branch will take several years to recover. Worse, this branch delivered a lot of foreign currency to Mexico.

The effect of the T-MEC or USMC trade agreement could boost some branches of manufacturing, but here also there is margin for uncertainty due to the new terms of the treaty. In any case, many studies have shown that towing capacity of the manufactured exports for the whole economy is restricted. In this way, even if the situation could improve, it is not going to get us out of the crisis as quickly as we would like.

In short, the duration of the depressive cycle of the Mexican economy cannot be calculated accurately at this time. What can be said is that it will depend on a set of political decisions. Governments, mainly those of the more developed countries can help by facilitating the manufacture of vaccines and providing funds (in Special Drawing Rights, SDRs) so that multilateral institutions such as the IMF and the World Bank provide resources to alleviate the burden of debts and for health and development programs. So far, little has been done in this regard.

On the other hand, an agreement is required between the three countries of the T-MEC so that the labor and environment clauses do not become an adverse factor for growth. A program for development should include Central American countries and allow Mexico to evolve from a maquiladora country into and economic export economy of goods with higher technology and inputs purchased within the country; the outcome would offer better wages for Mexican workers.

Finally, the boost to domestic production is essential. The construction branch, mainly for infrastructure works, is a field of action that requires public and private financing, but the latter will hardly increase if government spending does not direct it with new projects and financing (in addition to those that already exist.). In the case of services, the rescue of micro and small enterprises is essential. Similarly, it will be necessary to recycle the labor force that worked in sectors such as tourism to be placed in other economic branches with better prospects, through qualification and training programs, preferably in local green projects (reforestation, clean energy, recycling of polluting materials, cleaning of rivers and open dumps, etc.). Additional cash transfer for people (especially women) affected by unemployment or under employment in the formal and informal economy would help fight poverty and raise consumption levels.

The political decisions listed (and others not mentioned) are going to be made, one way or another. Nothing will happen because of the natural laws of the market. Citizens claim will play a fundamental role in putting pressure on their governments and shortening the economic cycle. If those responsible for running the institutions do not respond, the years of economic hardship will be longer, as well as the size of the political and social crisis.

Tema de investigación: 
Crisis económica