Economics: Trade balance for April augurs further crunch

MEXICO - Report 08 Jun 2020 by Mauricio Gonzalez and Francisco González

Foreign trade data for the first quarter reflected a deepening recession, as trust in the Mexican economy was fading and the first stage of the Covid-19 pandemic started to show its economic effects. However, April data clearly reflects the very deep contraction that is expected for the whole year and is a harbinger of much worse conditions to come in the next months.

After having trended lower in 2019 largely in response to discouraging signaling from the new federal administration, during the first three months of 2020 FDI fell to its lowest first-quarter reading since 2012, as adverse developments abroad entered into the mix. During the first quarter most FDI was directed at the financial sector, followed by automotive industries, which were starting to enjoy a reprieve from the extended uncertainty that had long surrounded enactment of the USMCA trade agreement. Most FDI was directed at Mexico City, which is also the country’s financial capital, followed by the country’s other major economic centers in the states of Nuevo León, Jalisco and the State of Mexico.

Similarly, the weakness in foreign trade that was observed last year extended into the first quarter, but accelerated dramatically in April as the pandemic’s toll on Mexico’s main trading partners translated into major declines in exports including an 80% plunge in automotive shipments to the United States, and petroleum exports were off 66.4% during the height of the oil market crash.

Unexpectedly, remittance flows rose to a new historical high in March apparently in anticipation of Covid-19 impacts to come and probably due to the fact that MX peso depreciation magnified the purchasing power of dollars sent back home. But with many Mexicans in the United States working in industries that have been hard hit, and following a 5% drop in remittances reported for April, we expect to see a pronounced contraction in the numbers starting in May given the extent of mass layoffs and corporate bankruptcies.

These results do not bode well for the Mexican economy’s outlook for the coming months, with no visible source of relief in sight given the Mexican government’s ineffective response to the recession and the recognition that a revitalization of the global economy may be a long way off.

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