Mexico - OECD Economic Outlook June 2020

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Mexico The pandemic will push the economy into a severe recession in 2020, driven by the global contraction, the fall in tourism, lower oil prices and the necessary domestic confinement measures taken. GDP would fall by 8.6% this year if there is another outbreak later in the year (the double-hit scenario). If further outbreaks are avoided (the single-hit scenario), the economy would contract by 7.5%, with a recovery in the second half of the year led by exports and consumption. In both scenarios, the level of GDP would remain lower than at end-2019, as it will take some time for the tourism and export sectors to return to pre-pandemic levels. The poor and vulnerable, including informal workers, will be particularly hard hit by the recession.

Mexico has put in place a wide range of fiscal, financial and monetary measures to address the crisis. Fiscal space is limited but, given the severity of recession, additional measures are warranted, as they will further mitigate hardship and reinvigorate the recovery. Such measures should focus on providing affected workers, both in the informal and formal sectors, with income support and avoiding that viable firms disappear.

Bolstering private investment will be key to achieve a job-rich recovery and this will require reducing regulatory burden and uncertainty.

Amidst the widespread pandemic, health system capacity has been increased Mexico recorded the first COVID-19 cases on 28 February. Transmission became widespread and cases were reported in multiple locations after mid-April. Mexico City, the State of Mexico and Baja California account for nearly half of confirmed cases but all 32 states have reported positive cases. There are large regional inequalities in health care quality and access. The high prevalence of obesity and diabetes is an additional source of vulnerability, while the relative young profile of the population is a positive factor.

Mexico GDP at end-2021 will be below its pre-crisis level Index 2019Q4 = 100,s.a.

110 105

Exposure to the fall in tourism is highš

Real GDP

% 20

Single-hit scenario

% of GDP

Double-hit scenario

% of employment

15 100 10

95 90

5 85 80

2019

2020

2021

0

0

OECD

MEX

0

1. Data show the tourism sector as a share of total GDP and employment.

Source: OECD Economic Outlook 107 database; and World Travel & Tourism Council.

StatLink 2 https://doi.org/10.1787/888934139746

OECD ECONOMIC OUTLOOK VOLUME 2020 ISSUE 1: PRELIMINARY VERSION Š OECD 2020

268 _

Mexico: Demand, output and prices (double-hit scenario) 2016

Mexico: double-hit scenario GDP at market prices Private consumption Government consumption Gross fixed capital formation Final domestic demand Stockbuilding1 Total domestic demand Exports of goods and services Imports of goods and services Net exports1 Memorandum items GDP deflator Consumer price index Core inflation index2 Unemployment rate3 (% of labour force) Current account balance (% of GDP)

2017

Current prices MXN billion

20 118.1 13 188.7 2 417.6 4 612.4 20 218.7 296.6 20 515.3 7 456.4 7 853.6 - 397.2 _ _ _ _ _

2018

2019

2020

2021

Percentage changes, volume (2013 prices)

2.1 3.2 0.7 -1.6 1.8 0.0 1.7 4.2 6.4 -0.8

2.1 2.3 3.0 0.9 2.1 -0.1 1.9 5.9 5.9 0.0

-0.1 0.6 -1.5 -4.9 -0.9 -0.2 -1.2 1.1 -1.1 0.8

-8.6 -8.3 2.3 -14.5 -8.3 0.1 -8.3 -9.2 -7.4 -0.7

2.0 1.6 1.8 3.0 1.9 0.0 1.9 2.3 2.0 0.1

6.7 6.0 4.7 3.4 -1.8

5.0 4.9 3.8 3.3 -2.1

3.3 3.6 3.7 3.5 -0.3

2.0 2.6 2.8 6.3 -0.1

2.4 2.4 2.4 6.0 -0.2

1. Contributions to changes in real GDP, actual amount in the first column.

2. Consumer price index excluding volatile items: agricultural, energy and tariffs approved by various levels of government.

3. Based on National Employment Survey.

Source: OECD Economic Outlook 107 database.

StatLink 2 https://doi.org/10.1787/888934138359

The authorities have taken several measures to contain the outbreak, including declaring a health emergency, voluntary quarantines and closures of schools, public offices, and most public spaces. The federal government has gradually strengthened distance measures as the pandemic evolved. Several states applied earlier and stricter confinement measures. The reconversion of public and private infrastructure into hospital facilities, hiring additional medical staff and collaboration with private hospitals helped to increase the capacity of the health system. Additional medical equipment and material have been acquired through air bridges established with China and the United States.

The economy is in a deep recession The necessary containment measures, coupled with the global economic downturn and declines in oil prices, are taking a major toll on the economy, which contracted sharply in the first quarter. The impact of the pandemic has intensified during the second quarter. More than 0.5 million formal sector jobs were lost in April, more than all formal jobs created last year. Tourism receipts collapsed, as recessions and travel restrictions in the main source countries reduced travel. OECD estimates suggest a decline in total activity of around 30% during the lock-down on the basis of certain illustrative assumptions. Mexico has also been hit by the adjustment of investors’ portfolios towards safe assets and the largest reduction ever of international investors’ holdings of emerging-market economies’ assets. At the onset of the crisis, the peso depreciated sharply similarly to currencies of other emerging-market economies. The strong policy framework has absorbed the rise in demand for foreign currency. Reserves remain sizeable, covering more than twice Mexico's annual gross external financing needs, including short-term external debt.

OECD ECONOMIC OUTLOOK VOLUME 2020 ISSUE 1: PRELIMINARY VERSION © OECD 2020

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Mexico: Demand, output and prices (single-hit scenario)

éѾÑâÆËÈ 2 https://doi.org/10.1787/888934138378

A wide range of fiscal, financial and monetary policy actions have been taken Policies have aimed, appropriately, at reducing long-term economic and social damage. Besides higher health spending, key fiscal measures include frontloading of social pension and disability payments and the public housing credit institute covering three months of workers’ debt. Among other measures, the government also announced additional lending to small businesses who have not fired workers or reduced salaries since the outbreak (0.1% of GDP), and additional liquidity by local development banks (0.2% of GDP). Specific credit lines for the informal sector, which accounts for 55% of employment in Mexico, have also been set up (0.1% of GDP). These fiscal measures, that are smaller than in most OECD countries, go in the right direction. The monetary policy interest rate has been lowered by 175 basis points since end2019, to 5.5%. The central bank also announced additional measures to foster orderly functioning of financial markets, strengthen the credit channels and provide liquidity in both foreign and local currency.

The flexible exchange rate is helping the economy to absorb the shocks.

The recession will be sharp Mexico will be hit hard by the pandemic, owing to its highly open economy with large exposures to trade, tourism, global supply chains, oil prices and remittances. In both scenarios, the recovery will be gradual and partial by end-2021. The projections assume that confinement measures are gradually lifted as from end-May, with differences across states depending on contagion dynamics. In the double-hit scenario, confinement measures will need to be reinstated and the recession will be deeper and the rebound weaker.

The unemployment rate will rise to a historic peak, above 7%, during 2020 and decline only slowly afterwards. Informality is expected to increase significantly. In the single-hit scenario, the recovery in 2021 OECD ECONOMIC OUTLOOK VOLUME 2020 ISSUE 1: PRELIMINARY VERSION © OECD 2020

270 _ will be stronger. In both scenarios, the fall in nominal GDP, the depreciation of the peso and the reduction of revenues will push the official measure of public debt above 55% of GDP. The main downside risk is a deeper-than-expected contraction and a slower-than-expected recovery in the United States. On the upside, exports could be stronger, as the new trade agreement with the United States and Canada is scheduled to come into force at mid-year.

There is room for further fiscal and monetary action Addressing the COVID-19 outbreak should remain the short-term overarching priority. Boosting testing and tracing capabilities and continuing to prepare the health system for increases in healthcare demand are important priorities. The fiscal and monetary responses have appropriately provided support to contain long-term economic damage. However, given the magnitude of the recession, further policy actions are warranted. On the fiscal side, recent fiscal prudence provides now some room for additional action, which could take the form of income support for informal and formal workers who have lost jobs or suffered significant income losses and a reinforced unemployment insurance scheme. Some states are granting temporary reduction on payroll taxes for SMEs, which could also be complemented at the federal level.

The credible monetary policy framework is helping to absorb the external shock and minimise current account imbalances. There is also scope for additional policy interest rate cuts to further support the recovery.

OECD ECONOMIC OUTLOOK VOLUME 2020 ISSUE 1: PRELIMINARY VERSION Š OECD 2020