Mexico’s Economy Just Fell the Most Since 2009. The Worst Is Yet to Come

(Bloomberg) -- Mexico's economy suffered its deepest contraction in over a decade during the first quarter, and the recession is expected to intensify amid a shutdown to contain the coronavirus pandemic.

Gross domestic product in the three months through March fell 1.6% compared to the previous quarter, according to preliminary data. The result, the worst since the first quarter of 2009, came in below the median estimate for a 1.4% drop from economists surveyed by Bloomberg.

On an annual, non-seasonally adjusted basis, GDP declined 1.6% during the quarter, the national statistics institute reported on its website Thursday.

A nationwide lockdown implemented to prevent the virus spreading and the oil price rout affecting state-owned producer Pemex will lead to a 6.7% plunge in economic activity this year, exceeding the Tequila Crisis of the mid-1990s, economists say. President Andres Manuel Lopez Obrador's decision not to spend on an aggressive recovery plan may mean that GDP falls as much as 12%, according to the most pessimistic forecast, from BBVA Bancomer.

The GDP result marks the fifth consecutive quarter of negative growth in Mexico, putting pressure on Lopez Obrador, who had promised the economy would grow 4% per year under his government. The president said the contraction was still better than what some had expected and that his administration is supporting small businesses with loans to go through the recession.

“We will move forward from both the health crisis and the economic crisis,” he said Thursday during a press conference in Mexico City. “I am optimist.”

What Our Economist Says
The sharp contraction in the first quarter is consistent with headwinds from the Covid-19 outbreak, lockdown measures, lower oil prices and tighter financial conditions. Compared with monthly economic activity numbers through February, the data implies a sharp decline in March. Results are consistent with high frequency indicators that point to a sharper contraction in April and in the second quarter and support concerns about the economic outlook in 2020.
-- Felipe Hernandez, Latin America economist for Bloomberg Economics

Industrial sectors, including mining, construction and manufacturing contracted 1.4% compared to the prior quarter, while agriculture, livestock and fishing industries grew 0.5%. Service sectors including commercial activity, transportation, financial and media contracted 1.4% from the previous three months, according to the preliminary data.

MEXICO REACT: 1Q GDP Drop to Give Way to Sharper 2Q Contraction

“The weaker performance and carry-over from the secondary sector and the very tepid and narrow-based fiscal response to the pandemic lead us now to now expect a deeper contraction in the current quarter,” Alberto Ramos, chief Latin America economist at Goldman Sachs, wrote in a research note.

Ramos now expects Mexico to contract 5.6% in 2020 from 5% before the release of the GDP report.

Health Emergency

Mexico declared a national health emergency March 30, just a day before the end of the quarter, requiring non-essential companies to halt production. But the impact from shutdowns in the U.S. was already rippling through Latin America's second-biggest economy and some activity, such as tourism, had stalled before the emergency was declared, according to Barclays Plc

“Local authorities and private companies moved to lock down conditions ahead of the government,” Barclays economist Marco Oviedo said. “Services represent 60% of the economy, and these are going to suffer more from the pandemic.”

The nation was already suffering from a technical recession last year after government decisions including the cancellation of a $13 billion airport project helped trigger a reduction in investment, and North American countries delayed the passage of USMCA, the trade agreement that replaces Nafta.

Mexico's stimulus plan to contain the virus is the smallest in Latin America, according to the International Monetary Fund, and Lopez Obrador announced he'd cut spending to pay for the recovery rather than taking on more debt.