Economics: Signs of a weaker economy in 2H 2019
For some time we have been discussing in these pages the extent to which external economic and financial headwinds as well as domestic political factors threaten to pull the Mexican economy into recession. Aggregate demand components through the first half of the year validated our view that the economy has been stalling through the first part of 2019 in response to a slowing of consumption and falling investment. However, they also showed that the enduring strength of manufacturing exports continued to afford the economy a minimal rate of expansion. Indicators for July and August point toward a third quarter as bad if not worse than what we saw in the first half, with the economy possibly headed for zero growth during the final stretch of 2019.
The odds of an imminent technical recession depend on many factors, although there can be little doubt that important risks loom with the potential to further diminish growth, and there is nothing on the horizon suggesting any demand-component recovery.
We can approach this from another angle by overlaying current trends and those that preceded and accompanied Mexico’s three previous recessions. Some indicators may be of little use in this regard, especially subjective readings of consumer sentiment, in which a politically fueled surge in optimism seems to defy hard economic data. But many others appear to be aligning with patterns not seen since the recession of 2009.
For example, the drop in consumption of durable and semi durable goods has been more pronounced than what we saw during the 2001-2002 recession. And while there was no significant decline in investment through the first half of 2019, we may be witnessing the early stages of a contraction similar to what preceded the 1995 and 2009 recessions, barring a positive change in the external and internal conditions that have de-incentivized investment.
We conclude by considering the probabilities of experiencing a further depletion or outright contraction of the main economic growth drivers in the next two years, and by presenting our latest baseline assumptions for the major aggregate demand components, which mainly point to an extension of weakening trends in private consumption, and in both public and private investment, along with declining export growth.
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