Different paths lead Brazil and Mexico to recession

They got there in starkly contrasting ways, but Latin America’s two largest economies find themselves in a similar and unenviable place two years into the pandemic: back in recession.

Mexican production contracted 0.1% in the three months to December, the government’s statistics institute reported today, after a 0.4% contraction in the previous period. Brazil’s $1.6 trillion economy, the only one in the region larger than Mexico’s, entered a recession in the second quarter of 2021 and is forecast to stagnate throughout this year.

Pandemic politics in the two countries could hardly have been more different. Brazil disbursed more cash than other emerging economies and more than many rich economies. His stimulus measures added up to about 12% of gross domestic product, according to the International Monetary Fund, translating into a historically large budget deficit.

Mexico kept spending so tight that even Wall Street economists, who often encourage fiscal prudence in developing countries, called for it to be increased. Excluding interest payments, the government came close to balancing its budget in both 2020 and 2021.

Yet both countries ended up with stagnant economies and little sign of much growth in the near future, a familiar result in Latin America, which was already a global laggard in the decades before the pandemic and is now hit harder than most. mostly due to COVID-19.

‘Synchronized recession’

“Both economies are now facing a synchronized recession, reflecting a combination of supply chain issues, local rate hikes, political uncertainty and their own structural issues.”, dice Adriana Dupita de Bloomberg Economics.

That does not mean that there are no differences.

Strong spending in Brazil triggered a much faster recovery. The economy shrank a relatively manageable 3.9% in 2020 and by March of last year had already more than made up that loss. Meanwhile, the government’s pandemic programs, including cash transfers to low-income households, managed to reduce poverty, briefly, to near record lows.

On the contrary, it is not expected that Mexico — which contracted more than 8% in 2020 — will return to pre-pandemic output levels through 2023. And it now has some 4 million more people living in poverty than in 2018.

But the growth of Brazil it declined when fiscal stimulus was withdrawn last year as the central bank embarked on the world’s most aggressive monetary tightening. It raised the reference rate by 725 basis points to curb inflation, which exceeded 10%, partly driven by public spending. Another 150-point hike is expected this week.

President Jair Bolsonaro, who is running for re-election in October, has started another round of cash transfers. But with monetary policy now pushing in the opposite direction, those measures are not expected to push growth much above zero for the rest of this year.

Some analysts say the spending is aimed at securing political support rather than propping up the economy’s potential by addressing its long-term weaknesses.

‘political survival’

“Is it political survival or populism“, He said Barbara Fritz, professor of economics at the Latin American Institute of the Free University of Berlin. “There are no measures such as industrial policies, investment promotion, or government reduction”.

Mexican President Andrés Manuel López Obrador, who daily criticizes neoliberalism in his morning news conferences, says his pandemic austerity will eventually pay off. Keeping the country’s debt load low, he argues, will ensure that Mexico avoids diverting too many resources to interest payments rather than social programs.

The national debt is around 60% of GDP, according to IMF figures, compared to about 90% in Brazil. Mexico’s central bank hasn’t had to raise interest rates as aggressively as Brazil’s, because inflation hasn’t spiked as sharply.

Even so, it is not yet clear whether many dividends will be seen in terms of growth. The IMF Mexico’s economy is expected to expand 2.8% this year, well below the 4.8% average for emerging markets.

‘extremely weak’

What is also striking is that both economies rely on growth engines that are the exact opposite of what their politicians promised.

Bolsonaro hired Paulo Guedes — an economist from a school of thought associated with the University of Chicago, which is famous for its reticence on public spending — to run things. He presided over massive fiscal profligacy, breaking budget rules that were supposed to limit outlays.

López Obrador came to power with the promise of reducing dependence on his giant neighbor to the north. But the biggest boost Mexico’s economy got in the last two years was the indirect result of US fiscal largesse in the pandemic, which triggered a boom in demand for Mexican exports, as well as a wave of remittances sent home. by immigrants who received stimulus checks.

Is “worrying”, dice Alberto Ramos, chief economist for Latin America at Goldman Sachs Group Inc., that Mexico only got so far by relying on US policy. Nor does he trust the prospects of Brazil: “Both have extremely weak growth engines.”

Another ‘lost decade’?

Which country will get those engines up to speed first, if any, is an open question.

For growth-oriented economists like Arturo Huerta of the National Autonomous University of Mexico, Brazil’s pandemic policy of boosting the economy and alleviating poverty through cash transfers offers better prospects.

Analysts who care more about fiscal risks, especially now that the Federal Reserve is about to start raising US interest rates, may see benefits in caution for Mexico and risks for Brazil.

The head of the central bank of the latter, Roberto Campos Neto, sounded as if he might be on that side in November, when he cautioned that Brazil’s combination of low growth, high debt, and rising inflation and interest rates suggests a outlook that “it is no longer sustainable, but explosive”.

Neither country appears to be close to achieving what has been elusive for the region’s economy of late.

Latin America needsinclusive and long-term growth”, dice Ernest Revilla, head of Latin American economics at Citigroup Inc. and former chief economist at the Mexican Ministry of Finance. “There’s the potential for another lost decade, but it’s not written in the books yet.”.