What was the economic environment in the country before the arrival of covid? What is now the outlook for the Mexican economy? What factors besides the pandemic influenced during this 2020?

Anik Dorner, PhD in Economics and professor at campus Hidalgo, explains for CONECTA the current and future situation of the economy in Mexico.

"We closed 2019 with an economic decrease, which means that the GDP instead of growing, decreased with 0.3%."

Anik mentions that this percentage was small, but they were already signs of deceleration. No one expected the historic drop that came with the COVID 19 pandemic.

"Internationally and domestically we already had many conditions, a more protectionist world, the tariff war between the United States and China and the arrival of the T-MEC."

A new government that changed the rules of the game at the national level, among other factors, caused 2019 to close with a slowdown in the Mexican economy.

He comments that in Mexico in 2020, as in almost the entire world, the economy froze. Experiencing a double shock between supply and demand.

"It shuts down the economy, for economic activity. There is no production, no aggregate supply. No economic activity, no income. If there is no income, there is no consumption, if there is no consumption, there is no aggregate demand.

He mentions that during the second quarter of the year, Mexico's GDP fell 17.1%; in the third quarter it recovered with an increase of 12%. However, it was unable to offset the second quarter's drop.

"This is due to the issuance of the authorization to reopen the economic sectors during June and July, which allowed the Mexican economy to reactivate. This helped to increase GDP."

Mexico and the country's economic recession

Dorner mentions that the meaning of recession can take three forms: if for two consecutive quarters GDP falls, if for two consecutive quarters GDP is negative, or as a sharp decline in output, income and employment.

"An economic recession typically lasts for six months to a year. It is characterized by contractions in many sectors of the economy."

He adds that Mexico is already experiencing an economic recession.

"Mexico's macroeconomic data, since 2000 are considered good, due to the fact that the monetary policy of the Central Bank of Mexico has been incredible."

The doctor in economics explains that the country had macroeconomic stability until 2018. She mentions that 2019 is the first year that closed with a negative GDP.

Compared to 2019, the closing of this 2020 is drastic. Estimates say that the economic decrease for Mexico with respect to GDP will be around 9%.

Mexican economy and new normality 2021

Dr. Anik emphasized the factors to consider for the forecast in 2021 to be favorable in economic terms.

"It is necessary to consider financial and non-financial risks, Mexico's credit rating, as well as the government's possibilities through fiscal and monetary policy."

He mentions that by 2021 Mexican GDP is estimated to grow between 2% and 3.8%, which means a good and prompt recovery of the Mexican economy.

"INEGI, Banxico, commercial banks and other institutions have forecast a rise in GDP."

He explains that inflation will close this year at around 4% and for 2021 it could be maintained or increase, but it will not reach drastic levels.

Regarding formal employment, he mentions that during 2020 there was a loss of between 800,000 and 1,000,000 formal jobs, which will gradually recover during 2021, although not completely.

Other factors to consider: T-MEC, minimum wage increase and Banxico reform.

Dr. Dorner mentions that it is also important to consider the economic events that took place this year.

With the entry of the T-MEC, changes in the relationship with the northern countries must be considered.

One of the main changes is related to the automotive industry, regarding the increase in the Regional Content Value (RVC) and the Labor Content Value (LCCV).

"In NAFTA the RCV was 62.5%, while in T-MEC the increase is 75%. This means that 75% of the essential parts of the car must be produced within the T-MEC zone."

He emphasizes that for the VCL the vehicle has to be manufactured in regions that pay 16 dollars per hour and in Mexico the minimum wage per day is 123 pesos.

For this reason, he adds that it is complicated for Mexico to achieve the T-MEC goal.

Anik explains that this is a challenge for Mexico. The entry of the T-MEC helped the drop in foreign direct investment for Mexico to decline by only 9%. While in the rest of Latin America it fell by 43%.

This is due to the fact that more foreign investment was received in the US and Canada increasing 13% with respect to the first three quarters of 2019.

Minimum wage from 123.22 to 141.70 pesos.

He mentions that although a 15% increase in the minimum wage in Mexico was approved this December, it is not enough to cover the treaty requirement. In addition, both the Business Coordinating Council and CORPAMEX rejected the 15% increase.

"This is the seventh time in Mexico's history that an initiative has been accepted without unanimity. There were 11 votes from the private sector against this initiative. It was not a good time to approve the increase."

He comments that for the private sector it is a complicated stage, due to the fact that 700 thousand companies are at risk with the approval of the increase.

"We must be prepared, and with the recession, Mexico does not have the economic support to carry out this increase".

He puts into context that as long as there is no growth in the GDP to justify the salary increase, it is not possible to generate economic growth.

Banxico's reform

Finally, he mentioned that the decision to continue with the issue of Banxico's reform in February has been accurate, due to the fact that it is a delicate issue and the repercussions can be devastating for the Mexican economy.

"Let's imagine that tourists come and want to exchange their dollars for pesos. Commercial banks and exchange houses have the obligation to check that those dollars do not come from illicit activities."

He explains that the reform plan proposes that of those excess dollars at the end of the year, Banxico would have to buy them.

"The impact would be on Banxico's international reserves and on Banxico's guarantee of the stability of the Mexican peso. And this interferes with the autonomy of Mexico's Central Bank." he concluded.

Performs an analysis of the effects that fiscal and monetary policy has on the performance of the economy (inflation, employment, growth). 4. A) Identify in Dr. Dorner's article the variables directly related to monetary policy that are mentioned, provide their definition and look up their latest available data. B) Identify the variables directly related to fiscal policy that are mentioned in the article, provide their definition and look up their latest available data. 5. According to the last changes observed in Mexico's reference interest rate, what changes would be generated on the existing quantity demanded of money in the economy (M1)? Explain your reasoning. 6. Identify in the article the different components of aggregate demand mentioned, provide their definition and look up the latest available data. 7. What is the relationship between these components and the circular flow of income and expenditure in the economy and the calculation of GDP? 8. According to the article, the Mexican economy is in a recessionary phase (recession gap), what effects would the use of an expansionary fiscal and monetary policy have on real GDP, the price level and the unemployment level? To answer this question use an aggregate supply and demand graph starting from an equilibrium with resource unemployment. You should use one graph to show the effect of fiscal policy and another to show the effect of monetary policy by shifting the corresponding curve(s). In each case, you must explain how the increase in public spending and the reduction of the interest rate generate effects on some of the components of aggregate demand, causing a response in it and in the equilibrium (real GDP, price level and unemployment level).

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