Mexican President Andres Manuel Lopez Obrador. Picture: REUTERS/EDGARD GARRIDO
Mexican President Andres Manuel Lopez Obrador. Picture: REUTERS/EDGARD GARRIDO

Mexico City —  Mexico’s economy sank the most on record in the second quarter, as a haphazard national response to the coronavirus pandemic hurt jobs and output while failing to slow the outbreak, posing a dire challenge to President Andres Manuel Lopez Obrador.

GDP in the three months through June fell 17.3% compared with  the previous quarter, according to preliminary data. The result, the biggest quarterly slump going back to 1993, came in slightly worse than the median estimate for a 17% drop from economists surveyed by Bloomberg.

On an annual, non-seasonally adjusted basis, GDP declined 18.9% during the quarter, the national statistics institute reported on its website on Thursday, compared with  a forecast of a 19.4% drop.

Latin America’s second-largest economy is expected to shrink close to 10% in 2020, representing its deepest recession since the Great Depression in 1932, according to analysts. Their forecasts have grown bleaker as Mexico continues to post records in new Covid-19 cases, putting the country on track to overtake the UK to have the world’s third-highest death toll.

“The worst has passed, our strategy worked and we are already improving,” Lopez Obrador said at his morning press conference on Thursday, pointing to a slower pace of job losses in July and saying he was optimistic about the third-quarter recovery.

However, Jessica Roldan, an economist at Mexican brokerage Finamex, said signs of fresh outbreaks as the economy tries to reopen suggested that Mexico may not see a significant drop in the pace of new virus cases until October.

“If the outbreak is not controlled, the hope for a robust recovery is totally off the table,” Roldan said. She said Mexico will take seven years to get back to GDP levels seen before the crash, with risks for an even longer recovery if the government further alienates investors with its policy decisions.

Lopez Obrador’s refusal to fund major stimulus to support companies, combined with the government’s response to the coronavirus outbreak, will consign Mexico to the slowest recovery among Latin America’s economies, according to Carlos Serrano, chief economist at BBVA in Mexico City.

While data on Thursday showed the US economy recoiled at an annualised pace of 32.9%, Mexico’s collapse was a much steeper 53.2%, though both countries shut down, Serrano said. “Why? The US had a counter cyclical policy while Mexico had none.”

Lopez Obrador has downplayed the use of face masks even as his finance minister said they were key to a successful reopening. Over the past weekend, officials said that there may be tens of thousands unrecorded deaths from the virus.

Services sector

Thursday’s data showed the service sectors including commercial activity, transportation, financial and media shrank 14.5% from the previous three months, according to the preliminary data. Industrial sectors, including mining, construction and manufacturing contracted 23.6% compared to the prior quarter, while agriculture, livestock and fishing industries fell 2.5%.

Mexico posted its biggest ever trade surplus in June as US demand, especially for food items, rebounded but anaemic non-oil imports showed that internal demand is recovering at a crawl.

Lopez Obrador said on Thursday that the country was on track to only lose 4,000 formal jobs in July after the economy shed more than 1.1-million posts from March to June. He touted the government’s social programmes and added that, just because GDP shrinks, it does not mean poverty will rise.

But earlier this month, deputy central bank governor Jonathan Heath said there were more than 34-million people in need of work, using a wider measure, while academics estimated that 16-million Mexicans may have fallen into extreme poverty between February and May.

The April-June result marks the fifth consecutive quarterly GDP decline for Mexico, derailing Lopez Obrador’s pledge to lift growth to 4% per year under his government. Policy decisions, including the cancellation of a $13bn airport project, helped damage business confidence and trigger a reduction in investment and capital flight abroad.

Concerns over the economy hit Lopez Obrador’s popularity, with his approval rating dropping to its lowest point since he took office, according to one poll earlier this month.

Julio Ruiz, an economist at Itau   in Mexico City, said subsequent policy moves this year have further deepened uncertainty. Still more changes are on the horizon: Lopez Obrador on Wednesday said in the second half of his term he may seek to alter energy laws that have attracted billions in investment.

“They continue to announce policies that generate uncertainty and that could curb the recovery a lot,” Ruiz said, adding that he was set to revise down his estimate for a 9% drop this year after the data.

Bloomberg

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