Mexico Quarterly Update - June 2020

Lockdown and social distancing measures will bring a steeper recession than the crises of 2008/09 and 1994/95

Mexico's real GDP contracted -2.2% yoy1 in 1Q20 – dipping further after the -0.8% contraction of 4Q19. It sets the table for a steeper economic contraction in 2020 (now expected at -8.0%) than that of the Great Financial Crisis of 2008/09 (-4.7%) and the Tequila crisis of 1994/95 (-5.7%). January and February, when COVID-19 was not yet a significant economic phenomenon in Mexico, the economy was already showing signs of lingering weakness. The lockdown and social distancing measures that ensued in March disrupted global supply chains and affected Mexican internal and external demand, pushing economic activity back into contraction territory.

Key takeaways:

• COVID-19 to inflict a bigger economic contraction than '08/'09 and '94/'95
• Financial volatility has increased; weaker peso impedes the central bank from taking aggressive action.
• Return to economic normalcy will depend on the pace of reopening rather than on economic policy.
• Low oil prices will affect export volume but not public finances in 2020
• The drop in insurance demand would not be as steep as for real GDP.
• Early reports point towards an increase in claims during the COVID period.