Mexico’s economy barely dodges recession in 2021 Fourth Quarter

Mexico narrowly avoided recession in 2021, as manufacturers adjusted to supply chain snarls and shortages amid a lack of fiscal stimulus.

The gross domestic product stayed unchanged in the fourth quarter from the previous three-month period, better than the median estimate for a 0.1% decline in a Bloomberg survey, according to final data released by Mexico’s statistics institute Friday. Preliminary data last month had shown GDP falling 0.1%, which followed a 0.4% third-quarter contraction.

Mexico, one of the world’s largest exporters, was plagued by global supply problems even while demand for its goods increased in the U.S., its main trading partner. The absence of significant government stimulus and the increasing hawkishness of the central bank in response to above-target inflation further dampened growth, with a 0.6% quarterly contraction of the services sector representing the biggest drag on the economy.

“The recovery in Mexico is extremely weak,” said Carlos Capistran, an economist at Bank of America Corp. It “is still far away from producing what it did before the pandemic, largely due to the lack of fiscal support.”

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Congress in April passed a law banning most subcontracting in an effort to fight tax evasion and ensure employers cover benefits. The measure helped to boost formal hiring, but at the same time hit services companies dedicated to labor outsourcing.

The Mexican economy quickly bounced back after the second quarter of 2020, when the country had instituted strict lockdown measures in response to Covid-19, but the recovery has been losing steam since the second part of last year. On an annual basis, the economy grew 1.1% in the last three months of 2021, slightly above the median analyst estimate for a 1% expansion. The country expanded 4.8% overall last year compared to 2020, according to Friday’s data.

President Andres Manuel Lopez Obrador has declined to follow many other countries in boosting spending to shore up the economy, arguing Mexico is better placed with less debt.

The IMF in January lowered its 2022 GDP forecast for Mexico to 2.8% from 4% just three months earlier and now sees that pace slowing to 2.7% in 2023.

Since the Fund’s last forecast, however, the U.S. Federal Reserve has taken a hawkish turn in response to elevated inflation, raising the specter of slower growth in the world’s largest economy and Mexico’s main trading partner. At the same time, persistent inflation at home has Banco de Mexico engaged in a tightening cycle that’s taken the key rate up to 6% from 4% last June, with further interest rate increases expected.

Russia’s invasion of Ukraine, which has triggered one of the worst security crises in Europe since World War II, adds a new element of uncertainty to both the growth and inflation outlooks.



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