Mexico’s Economy Falters as U.S. Chugs Along


MEXICO CITY—Mexico is slipping toward a recession even as the U.S. economy continues to grow, the first time in 25 years that the neighbors’ economic cycles have fallen sharply out of sync.

The weakening economy is a new challenge for Mexican President Andrés Manuel López Obrador, following this week’s resignation of his finance minister, Carlos Urzúa, who abruptly quit and blamed the administration for putting political goals above economic considerations.

Mexico’s National Statistics Institute reported Friday that industrial output fell 2.1% between April and May of this year, its sharpest monthly decline in over a decade. That and other recent data suggest that Mexico’s economy may have contracted during the second quarter of the year, in addition to falling by 0.2% in the first three months of the year.

“Mexico is virtually in a recession,” wrote

Bank of America

economist Carlos Capistran in a client note last week . A recession would put pressure on the administration and Mexico’s central bank to react, either by increasing government expenditures or cutting interest rates, or both, Mr. Capistran said.

A weak economy will make it harder for Mr. López Obrador to deliver on his promises to transform the country through spending on social programs and infrastructure, strain government finances by reducing revenues, and possibly spur more illegal immigration to the U.S.

Mr. López Obrador said Friday he doesn’t expect a recession to happen, and stressed the appreciation of the peso and the drop in inflation since he took office in December. He suggested that even a decline in economic growth wouldn’t hurt the poor since his government is focused on redistributing wealth.

“I’ve no doubt there could be that decline in the rate of growth, but the level of development is increasing, because now there is a better distribution of wealth,” Mr. López Obrador said. Under previous governments, “what little growth there was, was concentrated in a few hands,” he said.

For much of the past two decades, Mexico’s economy has generally grown or fallen alongside that of its northern neighbor, where Mexico sends 85% of its exports. While Mexico’s exports are still robust, politics on both sides of the border have cast a chill on new investment in Mexico, by both foreign firms and Mexican ones.

President Trump’s verbal attacks on Mexico and the renegotiation of the North American Free Trade Agreement caused anxiety among many investors and companies that operate south of the border. A new deal was signed last year to replace Nafta, but hasn’t been ratified by Congress, leaving its outlook uncertain.

Meanwhile, the rise of a leftist nationalist as president in Mexico also caused some nerves among Mexican firms.

Mr. López Obrador canceled the country’s biggest infrastructure project, a $13.3 billion airport for Mexico City, which was one-third built, and announced ambitious plans to remake state oil company Petróleos Mexicanos, or Pemex, by building an $8 billion refinery and injecting $5.2 billion in cash into the heavily indebted firm.

Fitch Ratings responded by stripping Pemex of its investment grade rating and downgraded Mexico’s sovereign credit, while Moody’s Investors Service and S&P Global Ratings have both turned negative on Mexico’s credit outlook.

In the Bank of Mexico’s survey of economists in May, none of the respondents said they thought it was a good time to invest in Mexico. The last time the perception fell so low was in November 2016, when Mr. Trump won the U.S. election.

Mr. López Obrador has also curbed government spending in an austerity drive to pay for a number of social programs, including pensions for the elderly and a jobs program for unemployed youth, which has further dampened growth.

President Andrés Manuel López Obrador has suggested that even a decline in economic growth wouldn’t hurt the poor since his government is focused on redistributing wealth.


carlos jasso/Reuters

Government expenditure fell about 6%, while net exports grew 2.2% and consumer spending remained stagnant, growing just 0.3%.

Increased spending could put government finances out of whack and provoke further downgrades, Bank of America said.

Mr. López Obrador “needs to realize that if he wants resources for his programs, the economy needs to grow and generate revenues for that, and for the economy to grow, he needs to generate confidence,” says Isaac Katz, a retired economics professor at Mexico City’s Autonomous Technical Institute university. “Indicators are piling up. If we aren’t already in recession, we seem to be heading there.”

Many economists now expect the economy to grow less than 1% in all of 2019, down from 2% growth last year. The Bank of Mexico estimates growth will be between 0.8% and 1.8%, while acknowledging risks that it could be less.

While the economic debate in the U.S. is whether a strong economy will diminish any chances the Federal Reserve might cut interest rates or if a 10-year expansion is about to end, the discussion in Mexico is whether the Bank of Mexico should cut rates to spur economic growth.

The Mexican central bank’s options are limited. Inflation has remained stubbornly above its 3% target, even core inflation which includes manufactured products and services that are more likely to react to changes in interest rates, while excluding more volatile energy and produce prices.

“The problem is, we can’t lower rates that easily” because doing so could exacerbate inflation, said Jonathan Heath, one of five Bank of Mexico voting board members, in an interview. “We’re basically very limited in how much we can use interest rate cuts to stimulate the economy…It’s kind of frustrating.”

Lowering interest rates too quickly risks driving inflation even higher, which could especially hurt lower-income Mexican consumers that the president has vowed to protect, said Mr. Heath, who was appointed by the new government in December.

“The best thing monetary policy can do to help them is, if they receive 2,000 pesos or 3,000 pesos a month from the government, that they maintain the purchasing power of that money,” he said. “Inflation hits the bottom part of the pyramid first by eroding the purchasing power of people who don’t have the power to protect themselves.”

Policy makers in Mexico are watching the Fed closely to see if it cuts rates at its meeting in late July, as Chairman Jerome Powell has hinted may happen.

The Bank of Mexico has often followed the Fed’s lead on interest rate moves, but has maintained a spread of about 575 basis points between the U.S. federal-funds rate and Mexico’s benchmark interbank rate. The Mexican central bank’s next chance to cut or increase interest rates is at its meeting the second week of August.

Write to Robbie Whelan at and Anthony Harrup at

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