Mexico’s economy enters technical recession

Mexico’s economy contracted for a second straight quarter in the last three-month period of 2021, according to official data published on Monday, putting it in a technical recession and joining regional powerhouse Brazil, whose economy fell back into negative territory in 2021.

Gross domestic product (GDP) in Latin America’s second-largest economy shrank in the fourth quarter by 0.1% from the previous three-month period in seasonally adjusted terms, preliminary data published by Mexico’s INEGI national statistics agency showed.

That beat out expectations in a Reuters poll for GDP to contract in the fourth quarter by 0.3%, after the economy declined by 0.4% in the third quarter.

Mexico’s Deputy Finance Minister Gabriel Yorio said Friday that talk of a “technical recession,” defined as two consecutive quarters of contraction, does not take into account coronavirus-related economic volatility and global supply chain issues.

Yorio said that global supply bottlenecks, increased prices for raw materials, and higher costs for ground transportation and sea shipping are weighing on the economy.

The disappointing Mexico data comes as Brazil’s weakened economy is in danger of sinking deeper into recession this year ahead of October’s presidential election, as anxiety over the vote and steep interest rate rises continue to hurt growth, according to a Reuters poll.

“With its weak Q4 outturn, Mexico has joined Brazil in technical recession, an extremely disappointing result that leaves real GDP in Mexico a whopping 4% below its mid-2019 pre-Covid peak,” said Fiona Mackie, regional director, Latin America and the Caribbean at Economist Intelligence Unit.

Moody’s Investors Service analyst Renzo Merino predicted that economic growth in 2022 would be lower than what Mexican authorities are aiming for, considering persistent negative momentum in investment.

“This situation may be repeated in the coming years, generating additional pressure on fiscal accounts in the remainder of (President Andres Manuel Lopez Obrador’s) six-year term, given the possibility of a lower performance of revenues and a growing rigidity in public spending,” Merino said.

Nikhil Sanghani, emerging markets economist at Capital Economics, took a more cautiously optimistic view, given an expected easing of supply chain shortages.

“We doubt that Mexico will remain mired in recession for much longer. Supply shortages appear to be easing which should allow auto production to strengthen while the drag to output from the outsourcing law will soon begin to fade,” said Sanghani.

Sanghani forecast the recovery will remain sluggish over coming quarters as a recent tightening of restrictions following the Omicron-related surge in virus cases in the near term and austere fiscal policy and tightening monetary policy in the longer term will weigh on the domestic economy.

INEGI’s figures showed that tertiary activities, which comprise the service economy, contracted by 0.7% in the fourth quarter from the previous three-month period in seasonally adjusted terms.

The decline of “the labor intensive tertiary sector (is) a reflection of the impact of the recently approved outsourcing law which led to a large decline in services rendered to corporates, businesses,” Goldman Sachs economist Alberto Ramos said in a research note.

Primary activities, which encompass farming, fishing and mining, rose by 0.3%, while secondary activities, which include manufacturing, increased by 0.4%.

The economy expanded by 5.0% for full-year 2021, the data showed, after shrinking by 8.5% in 2020 in what was Mexico’s worst recession since the Great Depression of the 1930s.

“The strong growth in 2021 is more the result of the arithmetic effect generated by the low base of comparison in 2020 and less due to genuine growth derived from productive capacity,” said Alfredo Coutino, head of Latin America analysis at Moody’s Analytics.

GDP grew by 1.0% in the fourth quarter versus the same period a year earlier, data showed.

INEGI will publish final GDP data for the fourth quarter on February 25.

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