A Stumbling US Economy Could Spell Trouble for MexicoBy Gabriela Mastache | Wed, 04/29/2020 - 12:05
According to the US Department of Trade, the US economy fell sharply in 1Q20. The fall, according to the media, is the sharpest since the 2009 financial crisis and is the direct result of the shutting down of the US economy due to the COVID-19 pandemic.
The US GDP fell 4.8 percent when compared to the same period in 2019 and brings the longest period of expansion of the US economy in history to an end. Though the US economy had positive indicators in terms of a shrinking import bill and more governmental spending, a steep decline in consumer spending combined with a record high in unemployment.
Though many states are now proceeding to open up their regional economies, economists interviewed by Reuters do not believe that the overall US economy will soon return to pre-Covid-19 levels. Moreover, economists expect a far steeper contraction for 2Q20 following a recession that started during the second week of March, when social distancing measures took place. Though most countries define an economic recession as the consecutive decline in real GDP for two quarters, the National Bureaus of Economic Research defines an economic recession as an overall drop in the economic activity lasting more than a few months.
Though many hoped that the US’ economic recovery would be quick or would follow a V-shaped pattern, economists do not believe this will be the case. Many small businesses will disappear and the 26.5 million people who have filed for unemployment benefits are not likely to be hired in the near future.
Why Does This Matter for Mexico?
Though INEGI has not released data regarding economic activity during 1Q20 (it is bound to release it tomorrow), odds are that the Mexican economy will also register an important fall. Unlike the US economy that in 2019 registered a 2.3 percent growth, the Mexican economy has been reeling for several months and in 2019 registered a 0.1 percent decline with primary and secondary activities experiencing a 1.1 and 1.2 fall, respectively. The current COVID-19 pandemic is expected to further impact economic activities.
An example of this is the Mexican electronics industry. According to WTO, dependence on foreign inputs will take a heavy toll on Mexico’s electronics production and exports. According to WTO, trade for categories that depend on complex and international supply chains such as electronics and automotive will continue to experience trade and production drops.
In this scenario, a sharp fall in the US economy spells trouble for the Mexican economy. The high dependence between the two North American economies and the fact that most Mexican exports are destined to the US have intertwined the destiny of both economies. A slow recovery for the US entails an even slower recovery for the Mexican economy, with recovery prospects far from the V-shaped pattern that most hoped for.