Photo: REUTERS/Andres Martinez Casares
Economy

COVID-19 and insufficient policy response were the main reasons for Mexico's second-deepest recession in 2020

Mexico's economy in 2020 had the second-deepest recession in the last century: 8.5%

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Mexico‘s economy last year suffered its biggest annual contraction since the 1930s due to the COVID-19 pandemic, though it recovered stronger than expected in the final quarter. Gross Domestic Product (GDP) in Latin America‘s second-biggest economy shrank by 8.5% in 2020 in seasonally-adjusted terms, according to the preliminary estimate published by national statistics agency INEGI on Friday, 29th.

“In 2020, Mexico’s economy suffered the second-deepest recession in the last century, with a contraction only surpassed by a fall of 14.8% in 1932 as a result of the Great Depression”, said Alfredo Coutino, head of Latin America Economic Research at Moody’s Analytics.

According to him, the economy contracted 8.5% in 2020 mainly because of the devastating effects of the COVID-19 pandemic but also the lack of planning and insufficient policy response of the current administration.

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“The external economy was affected by the fall in exports, mainly caused by the economic shutdown in the U.S. and also by the transitory fall in oil prices,” said Coutino. In the internal economy, he explains that contraction was amplified as a result of the strong hit of the pandemic given the insufficient health infrastructure, and the lack of policy response from the government.

But the annual drop in GDP was slightly less than predicted in a Reuters poll this week, which expected a contraction of 8.8%. During the final three months of 2020, GDP grew by 3.1% from the previous quarter in adjusted terms, beating the 2.8% seen in a Reuters poll.

What does the rebound of the Mexican economy depend on?

According to INEGI figures, compared with the same quarter in 2019, the economy shrank 4.5% in unadjusted terms in the October-December period.

However, Coutino points out that the economy is already rebounding since the third quarter of 2020, with posting positive growth rates in the third and fourth quarters.

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For 2021, he believes that the economy will recover mainly as a result of Mexico’s dependence on the American economy, such that the rebound of around 5% in the United States will strengthen the demand for Mexican exports and will increase the flow of remittances. 

“On the domestic economy, there is not much to expect since investment remains weak and household consumption is restrained by the loss of employment and reduction of income,” he adds.

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The arrival and distribution of the COVID-19 vaccine in Mexico is positive for the country’s economic prospects, says Coutino. “It removes the uncertainty about the cure for the disease. However, in Mexico the application is going so slow not only because of the limited supply but also because of the insufficient health infrastructure to deploy the vaccine quickly. If the inoculation advances faster along the year, then the economy could rebound even higher than 4% in 2021.”