August 24, 2016    3 minute read

The Decline In Mexico’s Economy And The Upcoming Challenges

Downward Path    August 24, 2016    3 minute read

The Decline In Mexico’s Economy And The Upcoming Challenges

Latin America has faced many problems in recent years. In particular, Brazil is suffering the consequences of economic and political scandals. Argentina is stagnating, and Venezuela has to deal with economic and social crises. In contrast, Mexico was expected to grow. However, this did not happen, and one of the reasons is the drop in oil prices that has slowed the country down, as its economy is largely based on oil exports.

A Downward Path

The country’s output shrank in the second quarter for the first time in three years, and it included the biggest drop in industrial output since 2009.

The economic decline came as a result of the slump in crude oil prices, which caused a crucial problem for the economy. Furthermore, equally important was the increase in the benchmark rate by the country’s central bank in June, after a sharp depreciation of the peso.

The growth for the fourth quarter of 2015 was revised down to 0.5% from 0.8%. In the first quarter of this year, the data was again revised downwards, with the economy growing by 0.5%.

In the second quarter, the country’s GDP contracted by 0.2% compared to the first quarter, but was still up 2.5% compared to a year before.

Drops Across The Board

The industrial production fell by 1.5% in Q2 compared to Q1, as a result of the lower oil and gas production and manufacturing output, which caused weak external demand for Mexican factory exports. This is the biggest drop since the first quarter of 2009. A negative trend was also seen in the fields of services which were marginally up by 0.1% in Q2, while agricultural production fell by 0.3%.

These problems seem to be exacerbated by the fact that US Republican presidential nominee Donald Trump talks tough about the economic relations between NAFTA countries, and the US and Mexico in particular. This has a serious impact on the trade relations between the two countries.

1.5% was the drop in industrial production
in Q2 compared to Q1

In particular, it is worth mentioning that imports from Mexico to the US have declined slightly in the last three-quarters, with $81bn worth of goods and services shipped from Mexico to the US at the beginning of this year. This may also have an impact on the future as long as Donald Trump promises to build walls and potentially introduce tariffs on goods from NAFTA countries. However, trade experts believe that this would have huge negative consequences for both nations, and should be avoided.

All the above information outlines the reasons behind the change to the growth forecast of Mexico, from a prior 2.2–3.2% to 2.0–2.6%, based on “unfavourable external conditions.” It also explains why the Mexican government has also lowered its public sector borrowing requirement for 2016, to a 3% of GDP ratio.

Conclusion

One can observe the difficult position of Mexico. Nevertheless, one also has to also notice the OECD report from June 2016, which suggests that Mexico will recover through the next year, despite all the difficulties that it faces, because of the structural reforms implemented by its government.

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