IHS Global Insight Perspective | |
Significance | Economic activity as measured by GDP plunged 8.2% in the first quarter of 2009, compared with the same period of 2008 year-on-year (y/y); seasonally adjusted data show a 5.8% decline in the first quarter of 2009, compared with the last quarter of 2008. |
Implications | This represents the biggest drop in the Mexican economy since 1995, when the so-called "Tequila Crisis" hit the country, although the major difference is that in 1995 the economic crisis was self-inflicted, while this year it is mostly the result of external contagion. |
Outlook | The outlook for Mexico is gloomy; the outbreak of the swine flu virus in April has delayed what could have been a prompt recovery in the second quarter. Following the United States, Mexico should come out of the recession in the second half of this year, albeit at a sluggish pace. |
GDP plummeted 8.2% year-on-year (y/y) in the first quarter of 2009, a victim of contagion from the U.S. recession and also negatively affected by lower oil prices. The United States is the destination of over 80% of Mexican exports and the Mexican government depends on the oil sector for over one-third of its total revenues. Mexico's business cycle is synchronised with U.S. industrial production, which in January–March sank 11.8% y/y. The recession in Mexico, however, is widespread; it had already been observed in the fourth quarter of 2008 when GDP fell 1.6%; services dropped 0.9% y/y and 7.8% y/y in the last quarter of 2008 and the first quarter of 2009, respectively. Figures for Mexican industry had fallen 4.2% y/y in the last quarter of 2008 and during January-March 2009 shrank 9.9% (see Mexico: 19 May 2009: No Signs of Improvement in Mexico as Industrial Production Decreases 6.7% in March). The primary sector, mainly agriculture and livestock, was the only one posting positive growth rates, but its share in total GDP is very small.
Government Efforts Fail to Stimulate the Economy
The Ministry of Finance reports that primary government spending increased 14.5% y/y in the first quarter of 2009, with spending in economic development jumping 51% and public investment soaring 79%. However, none of these figures seem to translate into the real economy judging by GDP numbers. Another important part of the economic stimulus package announced by the government relies on credit facilities and credit lines to different sectors, mainly small and medium-sized enterprises and housing (mortgages); while credit to businesses and mortgages continued to grow during the first quarter of the year, credit for consumption contracted significantly,
Manufacturing, Commerce, Real Estate, and Transport Hardest Hit
The sectors that have suffered most are manufacturing, real estate, transport, and commerce. All have posted double-digit declines. Manufacturing and transport have been directly affected by lower demand from the United States, which translated into lower production and lower exports. Although there has not been a housing bubble in Mexico, this sector was growing fast and, in part, this growth was being fuelled by purchases from foreigners, mainly U.S. citizens. Commerce activities plunging by 17.2% is just the crude picture of lower sales, both domestic and external.
Outlook and Implications
The outlook for Mexico has worsened due to the outbreak of swine flu; IHS Global Insight's baseline scenario is one of a relatively rapidly contained outbreak, but one that has been nonetheless very harmful to an economy already immersed in a deep recession. Tourism—and thus, tourism revenues—dropped substantially in April and May, and we expect only a partial recovery in June. Commerce activities will also be negatively affected. We do not expect tourism to resume normal levels until July. Under the contained outbreak scenario, disruption to trade would be limited, and the economic impact would be mostly confined to tourism and retail sales. We project the overall impact on economic growth to be -0.8% in 2009, and -0.3% in 2010. As the U.S. economy starts to recover, albeit at a sluggish pace in the second half of the year, so will the Mexican economy. Our latest forecast predicts that GDP will fall 5.8% in 2009 before it recovers and grows 2.4% in 2010.