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Mexico Economy Rebounds
Reopening of economy, trade, tourism, remittances boost economy.
BY LATIN AMERICA ADVISOR
Inter-American Dialogue
Mexico’s economy rebounded in the second quarter nearly 20 percent as compared to the same period a year ago, when much of its formal and informal economies were shut down due to pandemic-related restrictions. The quarter marked the first time since before the pandemic that Mexico posted year-on-year quarterly growth. What are the main factors driving Mexico’s economic recovery? Which sectors are faring the best, and which are rebounding at a slower pace—and why? What economic headwinds is Mexico facing in the period ahead?
Charles Seville, senior director for Americas Sovereigns at Fitch Ratings: INEGI’s flash estimate of GDP for the second quarter showed the Mexican economy’s momentum accelerating as compared to the previous quarter. GDP grew at a 6 percent annualized rate. However, I believe it’s more meaningful to think in terms of output levels rather than growth rates. Last year’s contraction was focused on the second quarter, and most of the recovery came in the subsequent quarter. As elsewhere, the biggest driver of the recovery has been reopening from the lockdown. Mexico’s output level according to the recent flash estimate is within 3 percent of its level in the first quarter of 2020, but the economy in some respects is far from fully recovered, featuring areas of strength and other areas of weakness. The tradeable sector, including goods exports, has outperformed the services sector. Non-oil exports in current U.S. dollar terms are 13 percent above where they were in the first quarter of last year, led by non-automotive manufacturing. Consumption and employment are slightly below pre-pandemic levels. The recovery from the pandemic will not be a straight line. Reopening is temporarily at risk given the spread of the Delta variant through the population, which is only 21 percent fully vaccinated. External demand from the United States, which helped drive the recovery, is unsurprisingly slowing. Supply shocks persist in auto manufacturing. Inflation has risen, eating into consumers’ buying power and leading the Bank of Mexico to raise interest rates. Even prior to the pandemic, growth had ground to a halt in 2019, reflecting a wait-and-see attitude on the part of some private investors in view of the administration’s numerous policy initiatives affecting business. This factor has not gone away and continues to delay the recovery of investment.
Amanda Mattingly, security fellow at the Truman National Security Project: Strong U.S. demand is driving Mexico’s economic recovery, demonstrating once again the inextricable links between our two economies. Mexico’s economy shrank 8.5 percent in 2020 due to the pandemic and accompanying shutdowns, but 2021 has seen significant growth led by the manufacturing and service sectors. Autos and electronics are in high demand in the United States, and Mexican factories have increased exports to meet that demand. The other major factors include rising oil prices, a resumption of remittances to Mexico and an increase in tourism. According to the Mexican tourism ministry, a new record of almost a million Americans traveled to Mexico in May. In many ways, the Mexican economy has benefited greatly from the Covid relief measures and stimulus checks cut by the U.S. government. With Covid vaccination rates improving in Mexico as well, there is hope the party will continue through the end of the year and into 2022. The IMF forecasts that Mexico’s GDP will grow more than 6 percent this year. The limiting factors are, of course, the rising number of Covid cases due to the Delta variant in the United States and Mexico as well as rising inflation. To be clear, growth in Mexico does not seem to be linked to any major economic policies of President Andrés Manuel López Obrador, who opted for continued austerity over fiscal stimulus measures last year. López Obrador’s attempts to undo the 2013 energy reforms of his predecessor Enrique Peña Nieto could also cast a pall over the current economic boom.
Andrés Rozental, member of the Advisor board, president of Rozental & Asociados in Mexico City and senior policy advisor at Chatham House: As is the custom by now, statistics from Mexico’s current administration tend to show only part of the story. The economic growth numbers for the first half of 2021 that the government has trumpeted use comparisons that are valid, but clearly one-sided. Comparing the first six months of this year with the same period in 2020 was bound to show a considerable gain, given the disastrous 8.5 percent decline of the economy in 2020. If, however, first-half growth in 2021 is compared to the last year before the Covid-19 pandemic, there was a 2.3 percent decline rather than a rise. Mexico’s economic recovery is sluggish at best, driven in large part by the booming U.S. economy and exports of manufactures. Other sectors, such as agriculture and construction, are stagnant at best and are below 2018-2019 figures. Even the manufacturing sector has shown no appreciable growth in the last several months. Financial services have done extremely well, with banks and fintechs showing triple-digit growth. The main obstacle to a rising economy continues to be President López Obrador’s constant attacks on the private sector, flaunting the rule of law and changing rules and regulations that play havoc with companies’ business plans. The recent additional downgrading of Pemex debt by a key ratings agency didn’t help either. Many domestic and foreign investors that have stayed on the sidelines since AMLO took office are still waiting to see whether the government, with a new finance minister, will change its policy and once again make Mexico a true attraction for new investment.
Joan Domene, senior economist at Oxford Economics: Mexico’s recovery has come in two different stages. The first, during the second half of last year, was driven by the mainly unrestricted industrial sector as lockdowns incentivized consumption of goods. However, supply shortages of semiconductors and other intermediate goods now limit growth in the sector. The second, predominantly during the second quarter, came on the back of the unparallelled lifting of domestic restrictions and a lack of restrictions on international travelers, which fueled the recovery in services and the battered tourism sector. In addition, the strong recovery seen in the United States had positive spillover effects in Mexico in the form of record remittances, strong exports and tourism. That being said, GDP will likely remain below pre-pandemic levels until later this year, and growth is likely to slow considerably next year. Risks remain tilted to the downside. In the most immediate future, slow vaccination rollout and the lack of international travel controls could bring a new wave of new variants that halts the recovery in services. In the medium term, the protracted period of depressed business confidence during the AMLO administration and null policy support during the pandemic and recovery phase weigh down future growth prospects.
Republished with permission from the Inter-American Dialogue's daily Latin America Advisor
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