You too, Uncle Sam? In addition to inflation, the US falls in the first quarter

Why does low growth occupy and worry us as much as high inflation? Next Wednesday, the Mexican government will announce an anti-inflation plan to respond to a crisis that began a year ago. The urgency is justified by the anxiety and the social risk caused by price increases in basic products. Nothing to criticize because they do something against inflation. This initiative, however, contrasts with the passivity in the face of the problem of no economic growth.

We went from mediocre growth rates to the prison of negative growth. Our economy is 4% smaller than it was in 2018. GDP was worth 18.52 trillion pesos at the end of 2018 and is now worth around 17.78 trillion, in real terms. The balance is negative because in 2019 growth was zero; in 2020, we fell 8.5% and in 2021 we grew 4.8 percent. For 2022, the consensus at the end of April is that GDP will grow a maximum of 1.8 percent. That means that we will be 2.2% below the level we had at the beginning of the six-year term. At the end of the fourth year of the López Obrador administration, the balance of per capita economic growth will be negative by more than six percentage points.

Almost all the spotlights are on the fight against inflation, why worry about growth now? Because there is a new data on the radar: the United States economy decreased in the first quarter of 2022. It was a 1.4% drop, instead of a 1% growth that was expected by the consensus of experts. This is relevant because the United States has been the main engine for the Mexican economy in these very difficult years, mainly through exports and remittances. The other three engines of growth have had little power in Mexico: public investment, private investment and consumption.

The fall in the GDP of the United States in the first quarter is a warning: Mexico will not be able to count on the milestone that the American locomotive provided in 2020 and 2021. In the first year of the pandemic, we find ourselves with the positive surprise that it fell in Mexico a part of the multimillion-dollar rescue plan for the United States economy. The crumbs of those hundreds of billions of dollars made a big difference.

How will the Mexican economy work with the United States growing less than expected? When the United States gets the flu, Mexico gets pneumonia. That happened before we had the FTA with them and it means that a crisis in the United States has repercussions in Mexico in the form of a corrected and augmented version. Lower growth in the United States will mean less demand for Mexican products and services from our trading partner. It is very likely that it will impact the amount of remittances that countrymen send to Mexico. Last but not least, lower growth in such a politically charged year in the United States may bring protectionist pressures and lead to new or greater obstacles in our “free” trade with them. In this sense, we must not lose sight of the fact that one of the first explanations that are being given to the surprising drop in GDP is the growth in the deficit in the US trade balance. It should be clarified that this hypothesis does not correspond to what economic theory says, but it works very well for the political arena.

Do you remember the alphabet soup to explain the trajectory of GDP? It is likely that in the Mexican case our fall/recovery is W-shaped because a relapse is coming. For growth, we don’t have a strategy. Private investment is in low hours and money transfers to millions of people are not enough to boost the economy. Instead of looking for a way to grow, there is an eagerness to find a narrative from the morning. First was the occurrence that there would be an alternative indicator to GDP. Then there was the other data. The president refers to the recovery of the minimum wage and the strength of the dollar as signs of economic strength and that the strategy of growing wild is working. The fact is that we suffer from stagflation. If the efforts are concentrated on inflation, we will continue with the stagnation. We have a problem.

lmgonzalez@eleconomista.com.mx