Adrián de la Garza
Director General of Economic Studies
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Mexico's Economic Revision in Times of Policy Uncertainty

By Gabriela Mastache | Tue, 04/07/2020 - 11:33

Q: Citibanamex has reduced the country’s growth expectation from 0.5 percent to -5.1 percent based on the impact from COVID-19. What prompted the reduced forecast?

A: There are two main elements behind this decision, both related to the COVID-19 emergency and the impact it is having on economies. The first is the external environment. In previous weeks, Citibanamex had already adjusted its growth expectations for the country from 1 to 0.5 to -2.6 percent. Then, we adjusted this further to -5.1 percent. The first reduction was done at a time when we anticipated that the COVID-19 effects would remain relatively contained within China. In that moment, we estimated that the impact on the Mexican economy would come from disruptions in the value chains. For instance, we expected that the lack of production from factories in the Hubei region would impact certain industrial sectors of the country, like the automotive industry. In that moment, we were also seeing a fall in oil prices, which also would impact the economy’s performance.

However, soon after we saw a rapid expansion of the COVID-19 pandemic in other parts of the world, including Mexico. Though the lethality of the virus is thought to be lower than that of  other diseases, estimates of the mortality rate have increased over time and its contagion rate is far higher. As the virus spread, it became obvious that the efforts implemented to prevent further contagion would significantly impact the demand for goods and services in different parts of the world.

All this deteriorated growth expectations at a global level. We have seen significant downward revisions of growth expectations pretty much everywhere, most notably for European countries, China and the US. The gloomier outlook for aggregate demand worldwide implied an even more dramatic fall in oil prices, which was exacerbated because of disagreements between Saudi Arabia and Russia over oil quotas. This, along with high levels of uncertainty around the spread of the virus, the potential economic measures implemented by governments, and their eventual impact, has contributed to a rapid deterioration of the international outlook.   

The second element we took into consideration was the domestic scenario. The Mexican economy is gradually reflecting what we have seen in other countries. Though Mexico is experiencing this crisis in a delayed manner when compared with other countries, given the impact that the crisis has had in other countries we can anticipate a similar situation in Mexico.

In addition, the fact that Mexico has done very few tests to effectively confirm the presence of the virus among the population points to a sanitary crisis that could extended further than what official figures suggest.

Experiencing the sanitary crisis and its consequences on the economic realm much later relative to Asian and European countries should have helped both the public and private sectors to anticipate the current crisis. However, it worries us that a more forceful response in terms of containment measures seems to have come late, especially from the public sector. For example, other Latin American countries, which experienced the beginning of the sanitary crisis around the same time as us, took stricter measures earlier. All this has generated lower growth expectations. According to our latest Citibanamex Expectations Survey, the Mexican economy will end 2020 with a (-)5 percent GDP contraction.

More than emphasizing a particular number, the direction is very clear. There have been several consecutive revisions because there is a great deal of uncertainty, not only regarding the virus but regarding the economic policy responses that central banks and fiscal authorities in different countries can provide. All this has an important repercussion on the expectations that the private sector might have regarding the growth of economies.

Q: How can governments and fiscal authorities generate the adequate conditions to reactivate economies as soon as possible?

A: In light of the crisis, it is important to put in place measures that will help the country sort out this shock, which in principle should be relatively short-lived. From a health standpoint and considering what we know from previous similar sanitary conditions and from countries like China, when stringent containment measures are taken, it is possible to limit the economic crisis to a few months. China is already seeing its economy recover.

However, this fast recovery stage is only possible if the virus is effectively contained, and if local and federal authorities, central banks and fiscal authorities provide support measures for companies and businesses. In my opinion, the most important thing is for governments to use their fiscal firepower both to prevent companies to fire workers and to support people who lose their primary income source, especially informal workers. There are different proposals in this sense, but it all boils down to sheltering the economy during the few months that the sanitary crisis lasts in order to prevent formal employment loss and support people in need. Once the sanitary crisis ends, we can then resume the course of the economy.

Photo by:   Citibanamex
Gabriela Mastache Gabriela Mastache Senior Journalist and Industry Analyst