Saturday, May 23, 2009

Quarterly GDP

Recent data from the statistics institute showed that Mexico's GDP decreased by 8.2 per cent. This is certainly the worst quarterly figure since the so called tequila crisis.

To have a broader perspective of the economic slump, it is necesary to state differences between both downturns.

First, clearly this is an external crisis, this is, it is not due to Mexico or any other emergent economy. Second,current crisis has not distorted prices in the same magnitude as in 1995. It is worth noticing that despite pressures on Mexican currency, the "pass through" has not pushed prices so high. Actually, inflation is only one eighth of that of the first quarter of 1995.

Third, this time around exports will not pull Mexico out of recesion. Worst, they are dragging it down. Take the following equilibrium condition that states how public and private domestic savings equal net capital outflows

S+(T-G)=I+XN

There are two features that characterize the Mexican economy: it saves poorly and it's tax revenues are poorer. This implies that the left hand side of the latter equality is negative. This lead to conclude that the right hand side must be negative.

So far there is nothing different. However export intensive the Mexican economy is, the very nature of it's exports imply considerably high imports. Most part of exports are manufactured goods, so intermediate imported goods are needed.

So, XN is negative as it has been in the last 14 years or so. The only channel remaining to adjust is investment. A strong argument can be constructed to explain how the current economic slump is explained by the fall of in-flow capital and the expectation of poor investment returns.

Sadly the latter argument lead to conclude two things. First, Mexico will not grow until the exports demand grow, inherently there is little to do in economic policy. Second, it is a necesary condition for growth that capital flows reach back to Mexico.

One paliative to the current recesion could be found in the increase of T (a decrease in G would be possible too, however this looks politically harder in the current G boom all around the globe). As the equation shows this will re-balance the lack of domestic savings, painfully this means a revenue intensive fiscal reform.

Mexican policy-makers should aim to survive the storm then.

1 comment:

Salvador said...

This economic crisis is very different than the last crisis during 1995, as you say, mainly by the absence of an inflationary spiral that is not added to the fall in aggregate output. Mainly, given their effects on income distribution. And yes, unlike 1995, sadly this crisis is not seeing as an opportunity to improve economic institutions in Mexico and around the world. Remember, during 1995, the financial system adequately improved, the government involvement in the economy was low, and the pension system for workers in the private sector was reformed positively.