Mexico dodges recession; economy stalls in fourth quarter

Mexico’s economy narrowly avoided recession in 2021 as manufacturers adjusted to shortages and supply chain hurdles amid a lack of fiscal stimulus.

Gross domestic product (GDP) was flat in the fourth quarter compared to the previous quarter, hovering above the median estimate of a 0.1% contraction in a Bloomberg survey, according to final data released Friday by the statistics institute. from Mexico. Preliminary data indicated that GDP fell 0.1%, after contracting 0.4% in the third quarter.

Mexico, one of the world’s biggest exporters, has been beset by global supply problems even as demand for its products increased in the United States, its main trading partner.

The absence of significant government stimulus and the central bank’s increasingly aggressive stance in response to above-target inflation further dampened growth, with a 0.6% quarterly contraction in the services sector representing the biggest drag on the economy.

In April, Congress passed a law banning most outsourcing in an effort to combat tax evasion and ensure employers cover benefits. The measure helped boost formal hiring, but at the same time hit service companies dedicated to labor outsourcing.

The Mexican economy recovered quickly after the second quarter of 2020, when the country put in place strict lockdown measures in response to COVID-19, but the recovery has been losing steam since the second half of last year. On an annual basis, the economy grew by 1.1% in the last three months of 2021, slightly above the median analyst estimate of a 1% expansion.

President Andrés Manuel López Obrador has refused to follow many other countries in boosting spending to prop up the economy, arguing that Mexico is better positioned with less debt.

The IMF in January cut its GDP forecast for Mexico in 2022 to 2.8% from a projected 4% just three months earlier and now sees that pace slowing to 2.7% in 2023.

However, since the Fund’s last forecast, the US Federal Reserve has taken an aggressive turn in response to high inflation, raising the possibility of slower growth in the world’s largest economy and top trading partner. from Mexico.

At the same time, persistent domestic inflation prompted the Bank of Mexico to start a tightening cycle that took the key rate from 4% to 6% last June, with further interest rate hikes expected.

The Russian invasion of Ukraine, which has triggered one of the worst security crises in Europe since the Second World War, adds a new element of uncertainty to both growth and inflation prospects.