The fourth wave of covid-19, the effects of the new legislation on subcontracting, the disruptions in supply chains and the uncertainty among entrepreneurs, have taken their toll on Mexico, which today faces a possible recession. Preliminary data from the National Institute of Statistics and Geography (Inegi) published on Monday show that the gross domestic product (GDP) grew 5% in 2021, an insufficient recovery to compensate for the dramatic drop of 8.4% in 2020. GDP fell 0 .1% in the last three months of 2021, compared to the immediately previous quarter.
“Mexico fell into the so-called double dip or W-shaped recovery,” Gabriela Siller, director of economic analysis, wrote in a report Monday. “It is highly probable that given the second quarterly drop in GDP, a recession has been experienced in Mexico. The high inflation of 2021 and the drop in GDP in the second part of the year suggest that the Mexican economy is going through stagflation, a situation that has not been seen in Mexico since the 1980s,” he added.
Stagflation refers to a condition in the economy in which, despite stagnation, the increase in prices of goods and services persists. This has been a worldwide fear, which is why the Federal Reserve in the United States and multilaterals such as the International Monetary Fund have ruled out that this is an evil that impacts the global economy. In Mexico, however, the data shows that this is already a reality. Inflation reached 7.36% in 2021, a level not seen in 20 years, for which the central bank has responded with interest rate hikes.
Peer countries in Latin America, such as Chile, Colombia and Peru, for example, register quarterly increases in GDP above the levels registered before the pandemic began. The US, whose economy is closely linked to the Mexican, grew 5.7% in 2021, the highest rate since 1984. Factors related to the pandemic, such as disruptions in the production of goods and services due to the fourth wave of infections, as well as global supply chain disruptions, explain only part of the stagnation in Mexico.
“The performance of GDP in the fourth quarter was determined by caution in the face of the fourth wave of covid-19, the effects of the outsourcing reform in Mexico, high inflation, uncertainty in Mexico and disruptions in supply chains,” Siller said. Last year a law initiative of the Government of President Andrés Manuel López Obrador came into force that prohibits subcontracting, or the outsourcing, to avoid labor abuses. The law was made in compliance with the commitments agreed by the Government with the US and Canada, during the renegotiation of the free trade agreement, the T-MEC. December of last year registered a drop of almost 313,000 formal jobs, according to an analysis by the Mexico research center, how are we doing?
Gross fixed investment has seen a drop since mid-2018, accelerating from the pandemic and López Obrador’s policy that seeks to grant state energy companies a monopoly in the market. During his Administration, proposals have been sent to reform the electricity sector and, more broadly, the energy sector, to limit the participation of private companies. López Obrador also seeks to classify minerals such as lithium, essential in the new electrical technologies free of fossil fuels, as “strategic” and under the control of the State. During his Government, in addition, permits and licenses have been frozen for renewable energy companies.
This has generated uncertainty in the private sector, undermining the performance of the economy. “Of the four GDP variables, for this year exports will decrease, consumption will contract, gross fixed investment will grow slightly, so public investment must be executed based on programmed public spending,” says José Ignacio Martínez, from the Laboratory of Commerce, Economy and Business (LACEN) of the UNAM. “THE CEN forecasts that in 2022 the growth of Mexico will be 2.5% with a downward expectation of one percentage point”.
“The Government must shield the internal market so that consumption flows. Confidence must be provided to the investor, certainty to the entrepreneur and security to the consumer to cushion the reduction in GDP by 2022″, points out the economist.
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