Economics: External sector recovery with persistent internal market weakness

MEXICO - Report 12 Apr 2021 by Mauricio Gonzalez and Francisco González

In recent weeks institutions and analysts have been upwardly revising their Mexico GDP projections for 2021, with most now roughly or exactly in line with the 4.5% growth estimate that we have maintained since January. These upward revisions are explained by the extent to which the US economy is now expected to deliver greater dynamism than previously anticipated, with the effect on Mexico to be largely concentrated in the reactivation of the export-focused manufacturing industries as well as the exceptionally robust remittance inflows that have helped to avert a more severe contraction of consumer spending.

Manufacturing linked to export markets began to embark on a major recovery late in 2020, with some branches even surpassing 2019 levels, but more domestically focused sectors contracted further as 2021 approached and are likely to remain weak. More broadly, industrial sectors with ties to the internal market and investment decisions such as construction of civil engineering projects and building activity continue to run well below 2019 levels and see no recovery prospects over the medium term.

The outlook is much worse among the service sectors for which the nature of the pandemic-related shock greatly curtailed activity and imposed very negative recovery prospects going forward amid the slow rollout of the government’s vaccination drive. These include especially pronounced setbacks in the case of leisure activities and the segment of lodging and food and beverage preparation (-36.4%), with no recovery anticipated at any point this year.

All of this suggests that many of the jobs that have been lost will not return in the near term due to the obstacles service industries continue to face. High underemployment is likely to endure through the current year alongside depressed levels of private expenditure, and we expect investment to remain depressed given the extent of uncertainty and the level of economic slack that will allow factories to easily meet demand with existing capacity.

Meanwhile, the government presses ahead with excessively optimistic economic growth projections as well as exceedingly sanguine revenue, spending and deficit expectations for 2021 that simply don’t add up.

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