Outlook On The Mexican Economy

During 2020, the partial shutdown of the economy caused significant imbalances in the Mexican productive apparatus, which already showed signs of weakness since 2019. In 2020, the Mexican economy had a drop in GDP at an annual rate of 8.2%, the secondary sector being the most affected with a 10.0% drop, as manufacturing activities also decreased by 10.0%, impacted by a 20.9% drop in transport equipment manufacture.

The drop in secondary activities was the result of worldwide effects on industrial production, negatively affecting global value chains and oil prices, which registered negative values during April 2020. Furthermore, confinement measures and mobility restrictions impacted tertiary activities with an annual 7.7% drop, particularly those related to trade and tourism, where, according to INEGI data, international tourists' arrival dropped by 46% during 2020. It is important to note that tourism represents close to 9% of total GDP, in addition to concentrating 6% of employment in the country and, as a consequence of the mobility restrictions and confinement measures established, it suffered a 43.6% drop during 2020.

In 2020, the increase in food demand, motivated by the seclusion measures, had a lesser effect on the dynamism of the primary sector-related activities, being the only item to show growth, with a 1.9% increase when compared to 2019.

At the beginning of 2020, the exchange rate was affected by political tensions derived from disagreements in oil prices. This increased the financial uncertainty resulting from the increasing nervousness linked to the pandemic. However, the second semester saw a gradual appreciation, driven by expectations of a possible vaccine. In this sense, the peso registered a value of 19.90 pesos/dollar at the end of December 2020. Additionally, the National Consumer Price Index (INPC) remained within the target range, driven by the falling fuel prices during the first half of the year. On the other hand, towards the second half of 2020, said index showed a rebound, derived from the rise in energy prices. Nevertheless, due to the performance of agricultural products, inflation weakened its upward trend at the end of the year, bringing the year-on-year inflation to 3.15% in December.

Despite the drop in the Mexican economy (-8.2%) during 2020, it was lower than forecast in June 2020, when the IMF estimated a drop of up to 10.5%. This is explained by the performance of exports, especially non-oil exports, which showed a robust recovery towards the second half of 2020, supported by the dynamism of the United States economy.

The impacts on total trade (exports plus imports) for 2020, caused by the pandemic, meant a three-year setback. In particular, during the second quarter total trade experienced values similar to those registered in 2005. Thus, in 2020, exports registered a value of 417.6 million dollars, a 9.3% decrease when compared to 2019.

Oil exports decreased 32.6%, affected by changes in mobility, consumption, and production patterns, being the most affected item during 2020. For their part, non-oil exports (96% of the total) fell 8.0% compared to 2019, derived from a drop of 8.9% in manufacturing exports (93% of the total non-oil exports). Within these, automotive products showed an annual decreased of 16.8%, electrical and electronic equipment and appliances 5.2% and machinery and equipment 4.9%. These sectors, in aggregate, represent 68% of all manufacturing exports.

In contrast, the agribusiness and extractive sectors suffered the least disruptions to their economic cycle due to the nature of their products. In particular, agricultural exports registered an annual growth of 4.7%, while extractive exports showed an increase of 19.7%.

Towards the second half of 2020, a strong recovery in foreign trade was observed, driven by buoyant exports. Non-oil companies were favored by the recovery of the United States economy resulting from the rescue packages in that country. Regarding imports, though showing a recovery trend, continue to reflect the weakness of the Mexican domestic market. As a result, the trade balance amounted to 34.4 million dollars at the end of 2020.

Source: Prepared by Bancomext with Information from INEGI.