April, 12,2020 – Alfonso Garcia, Jalisco
Mexico is heading for the most prolonged economic recession in 90 years, which will slow down business expansion plans, limit job creation, and restrict wage increases.
Given the economic ravages of the coronavirus, the world’s largest banks warn that the recession experienced by Mexico in 2019 will be prolonged and deepened this year.
After contracting 0.1% last year, they anticipate that social productive activity, measured with the Gross Domestic Product (GDP), will fall between 0.4% and 4.5% during 2020.
If this scenario is confirmed, it will be the first time that Mexico reports two consecutive years of economic contraction since 1929 and 1930.
Ninety years ago, the so-called Great Depression that originated in the United States directly hit Mexico, whose economy was still under the effects of the political crisis caused by the assassination of then president-elect Alvaro Obregon in 1928, a killing that led Congress to appoint Portes Gil as interim president, who led the country from December 1928 to February 1930.
In that transition, the GDP expanded 0.4% in 1928, then fell 3.6% in 1929 and plummeted 6.6% in 1930, according to information from Inegi.
After the passage of 16 heads of state, President Andres Manuel Lopez Obrador will have to face the most prolonged economic recession that has been seen in almost a century, where the investment of private initiative will be the critical variable to get out of this situation.
Just last week, Bank of America Merrill Lynch (BofAML), one of the three largest bank holding companies in the United States, had adjusted its forecast for Mexico from 0.5% growth to a 0.1% decline.
However, after evaluating the impact that will have on the country, the fall in the U.S. economy, the closure of borders, the temporary closure of companies in the world, and other situations caused by the coronavirus, the institution now projects a collapse of national GDP of 4.5%.
From the perspective of BofAML, Mexico has an economy highly exposed to external demand, and to the extent that global GDP enters recession, factories in the country will have to reduce their production.
This week, Credit Suisse, the second-largest bank in Switzerland, lowered its estimate for the Mexican economy from a 0.7% expansion to a 4% drop for this year. The British multinational Barclays expects a contraction of 2%, the U.S. giant Goldman Sachs expects a setback of 1.6%, and the analysis unit of the rating agency Moody’s anticipates a decline of 1.5%.
Meanwhile, J.P. Morgan, the most significant investment bank in the United States, reduced its forecast of a 0.7% growth to a fall of 0.4%, whose main arguments were the interruptions it expects in the supply chains by the coronavirus, a situation that will significantly impact the manufacturing industry.
He added that, eventually, the Covid-19 would limit activities related to services, particularly tourism.
Meanwhile, Lopez Obrador says that “the parameters of the ratings are no longer the Bible for Mexico,” and he does not share the vita point of Fitch, who cut Pemex’s rating last Friday. Fitch Ratings lowered one more step the grade of Petroleos Mexicanos (Pemex) within the speculative-grade, from ‘BB +’ to ‘BB,’ with a negative rating perspective. Last week, Standard & Poor’s also reduced the rating of the oil company in line with the decline that made a note of Mexico from ‘BBB +’ to ‘BBB’.