Tuesday, June 18, 2024

Recession fears erased: service sector drove 0.1% growth in second quarter

The economy grew by 0.1% in the second quarter of 2019, quashing fears that Mexico had already entered a technical recession.

The tertiary, or service, sector drove the growth, according to preliminary seasonally adjusted data published today by the national statistics agency Inegi.

Economic activity in the sector, which contributes to more than 60% of Mexico’s GDP, increased 0.2% between April and June.

The secondary, or industrial, sector, showed no variation compared to the first quarter of the year, while economic activity in the primary sector, which includes agriculture and mining, declined 3.4%.

The modest growth in the second quarter disproves forecasts from many analysts and financial institutions including JP Morgan and the Bank of America, which predicted a second consecutive quarterly contraction after a decline of 0.2% between January and March.

Most economists classify two consecutive quarters of negative growth as a technical recession.

President López Obrador pounced on the flawed forecasts at his morning news conference.

“Their forecasts didn’t work,” he quipped, declaring that “we’re very happy because the Mexican economy is responding” and “this is very good news for the people of Mexico.”

López Obrador said that the constant recession warnings had created uncertainty but added that the new Inegi data would dispel market fears and “the intention to create unease.”

“It was assumed that there was going to be no growth, [the economy] was going to decline, that with two consecutive quarters of declines we had entered into a recession. Well, it turns out that we didn’t . . .” he said.

Compared to the second quarter of last year, seasonally adjusted figures show that the economy grew 0.4% between April and June. During the first half of 2019, the economy grew 0.3% in adjusted terms compared to the same period last year.

William Jackson, an economist at Capital Economics, said the figures painted a picture of a struggling economy and argued that they could encourage the Bank of México to cut interest rates, which are currently set at a 10-year high of 8.25%.

“The key point is that this is still really, really weak,” he said. “We had already been penciling in a rate cut. Given the weakness of the economy and the way inflation is coming down, there is a reasonable chance of a cut in August.”

López Obrador might have penciled one in too. He told Bloomberg News on Monday he believes that Mexico’s interest rate is too high for a decelerating economy.

The central bank is looking to control inflation, he said, “but it is important to lower rates to encourage growth.”

While the president has said that he expects growth of 2% this year and has repeatedly shot down suggestions that the economy is heading for a recession, not everyone in his government has shared the same optimism.

The Secretariat of Finance said yesterday that it expected a second-quarter slowdown while on Monday, Finance Secretary Arturo Herrera announced a 485-billion-peso (US $25.4-billion) stimulus package that he predicted would have an “immediate impact” on the ailing Mexican economy.

Source: El Financiero (sp), El Economista (sp), Reuters (en) 

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