“Tick” Recovery in Doubt: Banxico

The optimistic tick-shaped recovery that Minister of Finance Arturo Herrera predicted for Mexico after the COVID-19 crisis looks less certain following the publication of the minutes of Banxico’s meeting (PDF) from last month discussing the country’s monetary policy ahead of the crisis.

The meeting witnessed a wide variety of broadly differing opinions. But among the many contrasting points of view was the general consensus that Mexico’s economic outlook appears a longer and harder road than previously forecast.

According to the minutes, all of the Banxico board members presented “referred to the severe deterioration of economic activity in Mexico” during the pandemic. “The majority pointed out there was a major contraction in the first quarter of the year and that the available information indicates that the effects of the pandemic will be exacerbated in April.”

The initial impact of the virus has been extended as social-distancing protocols and subsequent closures of stores, factories and offices, have been extended. But Mexican growth, too, is looking undecidedly shaky as the country, like most others in the globe, is struggling to get to its feet. “Everyone stressed that the prospects for growth have deteriorated. Most noted that by 2020, there are projections of a contraction of up to two digits. Some pointed out that the IMF recently adjusted its forecast of -6.6 to -10.5 percent,” noted the central bank’s minutes.

The length of recovery is now questionable. The novelty of the virus and the unprecedented extent of the global response means that predictions on economic outlook are made against a backdrop of uncertainty. A Banxico member stated that “there is still a wide dispersion in projections (on global economies), reflecting the high uncertainty, and that downward revisions for 2020 have not been compensated for by the corresponding upward adjustments of expectations for 2021.”

This positive note echoed again in the meeting with “the majority” of the meeting’s members saying that “the contraction of activity observed in the first quarter was deepened in the second quarter of the year, though some indicators from various economies presented some improvements.”

However, the potential for a second outbreak of COVID-19 cases as Mexico moves towards its “new normality” remains high. In several other countries, new outbreaks have led to reclosures of cities and local economies. Should this happen in Mexico, a W-shaped recovery, with two strong contractions, is more likely, noted the bank’s minutes.