A Long Road Ahead for the Mexican Economy

Mexico is a emerging market economy with well-built macroeconomic establishments. It is the fifteenth largest economy in the world with regards to its nominal Gross Domestic Product (GDP), standing at 1.258 trillion US$, as of 2019. The rapidly growing Mexican economy indulges in free trade policy and is highly dependent on its import-export activities, with the United States as its largest trading partner. Mexico is the world’s twelfth largest exporter and the fourteenth largest importer. The country deals with more than fifty nations as trading partners, primarily through fourteen Free Trade Agreements (FTAs). Among the Latin American countries, Mexico is the first to join the OECD (Organization for Economic Cooperation and Development). It actively participates in all OECD meetings and discussions about economic, social, and environmental issues and policies. However, the Mexican economy is plagued with the high-income disparity between the rich and the poor – second only to Chile among the OECD member countries – mainly because of low infrastructural development and tax revenue, adding to only 16% of GDP, the lowest among the OECD member countries.

The Mexican economy was expected to strengthen gradually in 2020 and grow significantly throughout 2021, led by improved consumption and investment patterns. The outlook for the export-oriented economy was very positive due to an outstanding performance by the oil and gas segment along with the construction and manufacturing industries. The anticipated growth levels were to boost export activities, increase minimum wages, and declining inflation rates. However, all these expectations have been hindered during the year 2020 due to the COVID-19 pandemic.

Pandemic-Hit Mexican Economy

COVID-19 outbreak was reported in Mexico at the end of February 2020 and has since spread quickly, with over 2,300,000 cases and 212,000 deaths recorded by 20 April 2021. On 30 March 2020, the pandemic was declared a health emergency. Like every other nation, the pandemic created huge financial chaos in Mexico, mainly in the areas of tourism, oil prices, and foreign trade – export demand. The Mexican economy shrank 4.5% in 2020 as the pandemic adversely affected factories, businesses, and households. It was the most crucial contraction since the 1994 Tequila Crisis as well as the global financial crisis 2008-09 when the economy suffered from high inflation rates and more people falling below the poverty line, which then resulted in steep migration rates.

Tourism is an essential sector in Mexico since the country depends greatly on the benefits of the industry. Before COVID-19, tourism has improved Mexico’s opportunities to expand employment, economic growth, visitor travel, and tourism development. The country’s tourism industry struggles to lure in people worldwide with the prevailing social distancing and safety measures. The year 2020 reported approximately a 50% decline in foreign visitors when compared to the previous year. However, earlier in 2021, Mexico lifted all travel bans and welcomed travelers by air for business or leisure.

Mexico is a minor oil producer but is highly dependent on its oil revenues as it holds about 11.1 billion barrels of oil reserves. The lockdown and movement restrictions resulted in a reduction of oil and gas consumption within the nation itself which means low oil demand. Pemex, Mexico’s national oil company, has reported losses for eight straight quarters since 2019. As the pandemic began, during the first quarter of 2020, Pemex reported US$23.6 billion in net losses, and production has only declined over time. The only positive outlook is regarding the Mexican oil hedge deals on Wall Street and investment in green energies for a more sustainable future.

Mexico’s export sector (especially manufacturing) was the only sector noting a positive growth throughout 2019 while the overall economy witnessed a meager 0.1% drop. Foreign trade and export activity has always been one of the most important driving forces of Mexican economic growth and development. Post the pandemic; this sector is struggling to grow on the back of low purchasing power in consumers who have been switching to cheaper products as well as delays in imports from various Asian countries. A large part of the inputs used in the production of goods in Mexico come from several other countries. Since there has been a considerable lag in receiving resources, a supply shock prevails in the market, slowing the overall economy.

Mexico’s central bank, Banxico, projects that the economy could contract further due to the lockdown measures against coronavirus and might suffer the most significant decline in the forthcoming years. “The shocks resulting from the pandemic are significantly and simultaneously impacting economic activity, financial conditions, and the inflationary process in Mexico, implying a complicated scenario for monetary policy,” Banxico said.

Informal Job Sector – A Backbone and Its Collapse

Approximately half of the country’s population is employed in the informal sector of the economy without any social security or health benefits, and the pandemic highly impacted these. A large section of society works on day-to-day earnings, and these include housekeepers, vendors, small business owners, and day laborers. The informal sector usually operates outside of government regulatory systems for income tax and other rules, making it particularly problematic for workers to access government support. Workers in this sector often live on the cliff of uncertainty. They tend to have close to little or no savings, so when a pandemic like COVID-19 occurs, hunger and homelessness will often follow.

As per Mexico’s national institute for statistics and geography, INEGI, 56% of workers were employed in the informal sector in the first quarter of 2020. The job losses were primarily seen in the manufacturing and tourism industries. A similar situation occurred as an outcome of the 2008-09 Global financial crisis when the country had witnessed the unemployment rate at its peak, and nearly 3.6 million people fell into poverty. Mexico was slow in responding to the pandemic, with the country’s president, Andres Manuel Lopez Obrador (AMLO), initially denying the dangers of coronavirus. This adversely affected the overall job market since the country did not take precautionary measures in time and the virus spread in a chain reaction.

Although it is evident that many Mexicans are suffering on the back of job losses due to COVID-19, the silver lining to the pandemic is the rising gig economy and the concept of remote working. First, let us understand who is recognized as a gig worker! While there is no actual definition of a gig worker, it is commonly recognized to comprise the labor force with contingent or alternate work arrangements––including independent contractors, on-call workers, and workers provided by temporary help agencies and contract firms. Among such workers, online platform employees or those with electronically mediated employment find jobs through online platforms and can render them offline or online. For instance, drivers for food delivery companies such as UberEats, packaged delivery for e-commerce companies like Amazon, amongst many others.

As the economic recession sets in, more and more people tend to use these applications frequently because they do not want to expose themselves to an unsafe environment. This has put more pressure on the delivery companies along with greater competition to urge more workers to join them since there is a constant need. The COVID-19 is one of the critical turning points for the gig economy. It gives people an alternative to earning their livelihood in different ways that did not exist earlier. It certainly presents an opportunity, especially for people suffering from job losses with absolutely no other option.

Can the Mexican Economy Reach Pre-Pandemic Levels Anytime Soon?

During the initial wave of COVID-19, the Mexican economy went through a major recession, ending 2020 in contraction. Before the pandemic kicked in, Mexico’s fundamentals presented themselves as quite solid, and this developing economy was growing continuously. As a consequence, export demand to the U.S. was on a roll and increasing constantly. With the lockdown and all COVID-19 restrictions setting place, the Mexican economy has some trouble coping. This is also due to the lack of preparedness and insufficient policies in place of the government. Mexico’s economy is financially shrinking due to the current pandemic scenario, and the situation might worsen still further, with the loss of numerous jobs each month. As a result, Mexican residents have become very mindful and aware of their spending or consumption patterns, adopting new ways and habits to save.

Mexico’s GDP is expected to grow at 3.6% in 2021 and 3.4% in 2022 after a massive contraction in 2020 on the back of strong macroeconomic policies fostering retrieval. However, of course, the nation has to be cautious in such a challenging economic environment. Mexico’s economic recovery is highly dependent on export demand, primarily on the manufacturing sector focusing on a global value chain. With the rollout of the vaccine and an improving job market, private consumption is likely to boost. The only course of action is to wait and watch and survive the global financial recessionary period at the same time.

– Aishwarya Lalchandani (Student of MA in Applied Economics at Christ University, Bengaluru)

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