Mexico: GDP contraction is inevitable; the decisions made will determine severity


The outbreak of Covid-19 will have a significant negative impact on economies at a global level with generalized shocks on supply and demand, therefore, we revised our GDP growth forecast to -4.5%. Fiscal objectives have to take second place; the most urgent is to underpin health systems and support workers.

Key points

  • Mexico is not isolated from the disruptions to value chains and will be severely affected by the foreseeable collapse in production and demand in the United States
  • The degree of uncertainty in which these projections are made is much greater than normal, but for now, we anticipate an economic contraction of 4.5% in 2020 with a strong downward bias if measures are not taken soon to curb the contagion. If the epidemic has not been controlled before the summer, the contraction will be even greater
  • Fate does not have to be inevitable, but a moment of truth like the present means that decisions must be made quickly, and what is decided will have important consequences for the future. The decisive measures that other countries are taking are necessary. The sooner they are taken in Mexico, the better. Our scenario assumes that decisions are made soon.
  • Total isolation is the worst scenario for economic activity in the short term, but the best to stop contagion, and therefore, the best ally for the fall in economic activity to be as short as possible and for the rebound to come as soon as possible and with the greatest possible force.
  • There is a need to quickly ease and adjust monetary policy, especially considering its lagged effects and thus, the forward-looking nature of monetary policy decisions. The depreciation of the MXN should not stop the Central Bank to ease monetary policy. In fact, Banxico is already behind the curve. Liquidity measures should be implemented soon in order to prevent further tightening in financial conditions.

 

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