Mexico Follows Brazil Into Recession With Quarterly Decline

(Bloomberg) -- Mexico became the second major Latin American economy to fall into recession last year, as supply chain shortages and lack of fiscal stimulus hurt activity.

Gross domestic product fell 0.1% in the fourth quarter from the previous three-month period, less than the median estimate for a 0.3% decline in a Bloomberg survey, according to preliminary data released by Mexico's statistics institute Monday. This follows a 0.4% contraction during the third quarter.

Latin America's two-largest economies are now stalled, with Brazil's shrinking in both the second and third quarters of 2021. Economists typically describe a country as being in recession when it posts two consecutive quarters of economic contraction.

Mexico, one of the world's largest exporters, was plagued by global supply problems even while demand for its goods increased in the U.S., its main trading partner. The absence of government stimulus and the increasing hawkishness of the central bank in response to above-target inflation further damped growth, with a 0.7% quarterly contraction of the services sector representing the biggest drag on the economy.

“High inflation and the fall of GDP in the second half of 2021 suggest that the Mexican economy is passing through stagflation, a situation not seen in Mexico since the 1980s,” said Gabriela Siller, director of economic analysis at Banco BASE.

What Bloomberg Economics Says
“The results suggest the government's agenda is not helping, but President Andres Manuel Lopez Obrador may argue more is needed and choose to double down before considering an alternative. Falling activity also increases constraints on monetary policy and makes it more costly for the central bank to continue hiking interest rates. But with inflation and inflation expectations above target and rising, policy makers have no option but to continue tightening.”
-- Felipe Hernandez, Latin America economist
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While the Mexican economy quickly bounced back after the second quarter of 2020, when the country had instituted its strictest lockdown measures in response to Covid-19, the recovery has been losing steam, putting pressure on the government of President Andres Manuel Lopez Obrador. On an annual basis, the economy grew 1% between October and December, below the 1.5% expansion expected by economists. AMLO, as the president is known, has repeatedly refused to implement large fiscal stimulus as other countries did to protect its activity from the pandemic-driven slump.

The peso fell to as much as 20.85 against the dollar before recovering slightly after Monday's announcement.

The Mexican government has pushed back on the idea that Mexico is in recession, with Deputy Finance Minister Gabriel Yorio saying before the data was released that other variables such as unemployment should also be taken into account. “Employment is growing, and use of the country's production capacity is increasing. Many of the people who lost their jobs are returning to work,” he said on Friday.

Gabriel Lozano, chief economist for Mexico and Central America at JPMorgan Chase & Co, described the Mexican recovery as W-shaped. “And we are in the second dip,” he said.

Rate Impact

The current recession poses a problem for the central bank with a new governor, Victoria Rodriguez Ceja, at the helm since this month.

The bank opted for a 50 basis-point interest rate hike in its last decision, in December, a more aggressive move than in previous meetings. But continuing that pace of adjustment in Banxico's Feb. 10 meeting could put a wrench into an economy that is expected to grow just 2.5% in 2022.

“Despite the softness of the economy, we expect that Banxico will prioritise tackling high inflation and will deliver another 50 basis-point rate hike next week,” Nikhil Sanghani, Latin America economist at Capital Economics, wrote in a note to clients.