Mexico's economic recovery expected to be gradual and prolonged
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Mexico’s economic recovery expected to be gradual and prolonged

The Board of Governors of Banco de México (Banxico) indicates that the economic recovery will be moderate, as gradual growth rates are expected for the coming years.

Following the devastation caused by the COVID-19 pandemic, Banxico believes that although there is an economic recovery, activity is still below pre-crisis levels and the pace of growth was moderated. 

In addition, external demand showed greater dynamism, since during October 2020 exports, especially from the manufacturing industry, surpassed the levels recorded before the pandemic began. 

Surely, there is weakness in consumption and overall investment, so recovery in these areas is expected to be slow. However, the manufacturing sector showed the strongest recovery last year, while construction and services are still recovering. 

Therefore, Banxico indicated that economic recovery will be gradual and prolonged, as moderate growth rates are expected for the coming years. 

Furthermore, according to several analysts, the GDP will show positive growth this year, with an increase between 3.8% and 4.5%, as the pandemic is still the main risk factor threatening economic growth.

Prospects for economic recovery

Alejandra Marcos, Director of Analysis and Strategy at Intercam Casa de Bolsa, stated that the Financial Group foresees a 4% annual GDP recovery for this year, arising from a strong push from external demand led by growth in the United States. However, the main risk threatening the growth of the Mexican economy is the second wave of COVID-19 infections spreading and that, in response, governments will tighten restrictions on productive activities, as well as population mobility.

Additionally, the analyst estimates that the wholesale exchange rate for the closing year will be between 20.50 and 21.50 Mexican pesos per U.S. dollar, while inflation will range between 3.5% and 3.4%, and tourism, services and commerce sectors will benefit from low annual basis of competition. 

Regarding what must be done nationally to strengthen the Mexican economy, a new private investment cycle must be formed, which has not occurred since 2016 in the wake of the U.S. elections where Donald Trump was victorious. 

Regarding the U.S.-Mexico relationship with Joe Biden as U.S. president, he stated that even though in the future U.S. manufacturing will receive subsidies and grow at a faster pace, the result will not be to the detriment of the Mexican industry, since the efficiency of operating costs in Mexico is much higher than in the United States. 

Gabriela Siller Pagaza, Director of Economic-Financial Analysis at Banco BASE, said that there will be a moderate 3.8% rebound effect in GDP this year.

Exports are expected to increase by 12.3% this year and positive Foreign Direct Investment (FDI) flows are expected to be reestablished after the worst moments of COVID-19 have passed. Less consumer caution and a vaccine will help to stimulate growth this year. 

Siller expects a 4% annual drop in GDP in the first quarter of the year, followed by a rise of between 13% and 14% between April and June, a moderate growth of 3.10% in the third quarter and finally, an annual variation in the final quarter of the year.

Marco Oviedo, Chief Economist for Latin America at Barclay’s said that the Financial Group expects a 4.5% recovery this year.

This is due to the availability of vaccines and a vaccination plan in place, which will have an effect on GDP starting in the second quarter of the year, with an annual expansion of 16.5%; therefore, there would be a 5.8% increase in the first half of the year.

One of the biggest risk factors for the direction of the economy is that, in the face of the rapid recovery of the United States’ GDP, there will be less tax incentives and talk of higher taxes will begin.

 Economic Recovery in Latin America

According to projections made by Moody’s Investors Service, the economic recovery in Latin American countries will be slow compared to the rest of the world.

They noted that this is due to the strong impact on employment, the lack of government social safety networks, limited savings and low-income levels compared to the rest of the world.

A document entitled “Negative Outlook for Latin America and the Caribbean in 2021 before Weak Pandemic Recovery and Social Pressures”, prepared by Moody’s, points out that Mexico, Argentina and Brazil will not reach their 2019 production ranges until at least 2023.

Additionally, countries that rely more on intensive services and oil exporters will face weaker recoveries compared to manufacturing-led economies. Therefore, the region’s major economies, Chile, Colombia and Peru will likely reach 2019 production levels by 2022.

The aforementioned document expects that the region’s economies will grow by more than 3%, but GDP will remain below pre-pandemic levels after a contraction of more than 5% in 2020.

Oradel Industrial Center seeks to contribute to Mexico’s economic recovery through the sale and rental of industrial buildings for manufacturing and logistics operations. 

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