Ricardo Pascoe Pierce
In 2020, at the beginning of the economic downturn caused by the Covid pandemic, Banamex’s research division made a risky forecast. It stated that the Mexican economy will not manage to recover the level it was at when López Obrador assumed the presidency in 2018 until the distant year 2025. That is one year after the end of the current six-year term. Banamex started from pre-pandemic negative economic data: in 2019, growth was negative 1% compared to the previous year due to the uncertainty created by the cancellation of the Texcoco airport. Private investment plummeted.
From that moment and up to the present, AMLO has insisted that the country has already recovered what it lost economically with the pandemic in terms of jobs, wages, and investment and is now moving beyond that. The data from the real economy tells a different story. While the President claims that there will be 3% growth this year, all economic and trend data suggest real growth of between 1.2% and 1.8%. This data tells us that the national economy has not recovered from the -8.5% decline in 2020. In 2021, when growth was 4.8%, it was still in negative territory. It is the same case in 2022 when, assuming a 1.8% growth, Mexico’s economic growth is still negative compared to 2018.
And worse economic times are coming. The GDP growth forecast for 2023 is negative -1%, as in 2019. The certainty that a global economic recession will hit our national economy hard is predicted. Will it be a prolonged recession or a short one? The global context of the battle to recover from the ravages created by the pandemic and the harmful effects of the war between Russia and Ukraine are the main elements guiding the perception of the inevitability of the global recession and, therefore, in Mexico.
The duration of the recession will depend on international and domestic factors. At the global level, it depends on the extent of the war and, therefore, on the price of gasoline and the scarcity of grains (mainly wheat) and fertilizers in the global market. Food prices and the production and transportation costs of raw materials and manufactured goods depend on these factors.
If the U.S. economy maintains its current pace of demand for agricultural products and manufactured goods from Mexico, the country would be able to sustain a certain productive rhythm that could alleviate the specific weight of the global recession.
Everything depends on the policy AMLO intends to follow concerning the USMCA and the United States. One day, he wakes up intending to collaborate in creating large common markets, and the next, he wakes up thinking of decoupling or separating our economy from that of the United States.
Political ambiguity and lack of certainty inhibit investment, which is prone to seek security for its activities. In addition, domestic conditions are essential in determining policy. For example, the current policy of subsidizing gasoline prices as an anti-inflationary policy could be sustained for a few months, but will it be maintained for years if the war in Ukraine continues? Public finances are obviously under enormous stress from the financial cost of this “endless” subsidy.
If this subsidy were not applied, says the Treasury, the cost per liter of gasoline would be around 34 or 35 pesos per liter. The Treasury also calculates that inflation would be approximately 11% per year without the subsidy, not 7.9%, as it is currently. Mexico is one of the Latin American countries with the lowest gasoline prices and the lowest inflation. All thanks to the gasoline subsidy, boasts the Treasury. It forgets about unemployment and the massive migration of Mexicans to the northern border.
Venezuela made the same maneuver with its gasoline prices as an anti-inflationary measure and a subsidy to the general population. And it worked until it ran out of the ability to balance oil revenues with fiscal expenditures overwhelmed by pharaonic plans and projects and the subsidy to the population. A fiction economic policy was created where society became entrenched and did not accept that it should stop being applied. Today, the migration of Venezuelans is its primary exportable good.
Something similar happens with the 4T. The gasoline subsidy is an ideology instead of a rational public policy, and it will not cease to be applied, even if oil revenues are no longer sufficient to finance it without indebting the country. Data from the Ministry of Finance indicates that we are reaching this breaking point.
The bankruptcy of public finances, the economic recession, and a growing inflationary trend does not bode well for Mexico. We have a President who is determined to lead the country with an ideological agenda. That ideological agenda will only aggravate the country’s problems when facing the horror of a wasted six-year term.
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