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Weekly Report - 14 May 2020 (WR-20-19)

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MEXICO: Tensions over reopening the economy

Mexico’s automotive industry, as well as its mining and construction sectors, will reopen on 18 May, and a gradual lifting of measures to contain the coronavirus (Covid-19) pandemic will follow on 1 June. Confirmation of a post-lockdown economic resumption and a ‘new normality’ was made on 13 May by the health minister, Jorge Alcocer, although various state governments are likely to defy the federal government over easing the current restrictions. Alcocer insisted that “health and lives” were the number one priority, but the federal government is desperate to reactivate the economy amid some of the bleakest growth forecasts in the region.

Alcocer said the reopening of the Mexican economy would be “progressive”. Graciela Márquez, the economy minister, argued that businesses were pushing for the construction and automotive industry to reopen to maintain supply chains with the US.

The success of the reopening of these “essential” economic activities will have a big bearing on the scale of Mexico’s contraction this year. Even if cases of Covid-19 are contained and they remain open, various international organisations are predicting that the economy could contract by 6% this year, but if cases surge, and the federal government is compelled to announce another lockdown, they are forecasting that the contraction could be as large as 10%. Mexico’s social development agency (Coneval) published a report on 11 May projecting that 8% of the population, some 10m people, would fall beneath the poverty line in the country in the event of a 6% contraction.

The economy was in poor shape even before the pandemic, having dipped into recession in 2019, the first full year in President Andrés Manuel López Obrador’s six-year term. GDP shrank by 2.4% year-on-year in the first quarter of 2020, according to preliminary figures released by the national statistics institute (Inegi) at the tail end of last month, on the back of a fall in activity in all economic sectors. GDP fell by 1.6% compared with the final quarter of 2019.

López Obrador tried to put a positive spin on the data, arguing that it was “better than had been expected” by some analysts. He also took some comfort from the fact that the US-Mexico-Canada Agreement (USMCA) was finally ratified on 24 April. The US government notified the US Congress and the governments of Mexico and Canada that it had complied with all the domestic procedures required for the USMCA to enter into force. This follows notifications issued separately by the governments of Mexico and Canada on 2 April, and concludes the necessary requirements in all three countries for the USMCA to be implemented.

The new agreement, replacing the North American Free Trade Agreement (Nafta), is now due to take effect on 1 July, a date that had been previously agreed by the three governments. Mexico’s foreign ministry (SRE) issued a statement saying that when the USMCA enters into force it “will give impetus to the economic recovery of Mexico and the North American region after the health emergency caused by the Covid-19 pandemic”.

A bipartisan group of 19 US senators had sent a letter to US Trade Representative Robert Lighthizer urging a delay to the implementation of the USMCA on the grounds that it would place too much pressure on US companies, reeling from the impact of Covid-19, to adapt to the new rules in such a short space of time. But Lighthizer contended that “the crisis and recovery from the Covid-19 pandemic demonstrates that now, more than ever, [the US] should strive to increase manufacturing capacity and investment in North America”, and that the USMCA was “a landmark achievement in that effort”.

Unemployment

As many as 555,247 jobs were lost in Mexico in April, according to a report by Mexico’s social security institute (IMSS) released on 12 May, as a result of the coronavirus health crisis. Around 20% of the job losses were in Mexico City. The biggest job losses were in the construction and mining sectors. As these sectors are due to reopen on 18 May, some of these job losses could be reversed.