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Mexico risks deepest crash since 1932, central bank warns

GDP could contract as much as 8.8% in 2020.
Image: Bloomberg

Mexico faces what could be its worst contraction in almost a century this year as the crash in oil prices aggravates the slump caused by the coronavirus pandemic, the central bank said.

Gross domestic product may contract in 2020 as much as 8.8% in the central bank’s most negative scenario, it said in its quarterly inflation report published Wednesday. Even in the best-case scenario the economy will shrink 4.6%, which would be its worst performance in more than a decade, Banxico, as the bank is known, said in the report.

The bank also sees a risk of a so-called “U-shaped” recovery in which the economy continues to contract in 2021.

“We’re clearly in a generalized and profound contraction”, bank Governor Alejandro Diaz de Leon said in a press conference after the report was published.

With the crisis still in its early stages, economic slack will deepen for some time to come, Diaz de Leon said. There are further downside risks from new outbreaks of the virus, more credit rating downgrades, or stimulus that falls short of what’s required, according to the bank.

As many as 1.4 million jobs may be lost this year, according to the report. The bank sees medium-term inflation expectations as relatively stable, even though the pandemic has increased food prices recently.

The central bank sees the economy rebounding next year in two of its three scenarios. Inflation is set to accelerate to 4% by the middle of next year, from 2.15% in April, then slow to its 3% target by the end of 2021, the bank said.

Core inflation, which excludes volatile food prices, is forecast to accelerate until the fourth quarter of this year.

Read More: Mexican Economy Slumps Most Since 2009 Even Before Shutdowns

The central bank has slashed interest rates in the face of the crisis to the lowest since 2016. The last such cut on May 14 followed two unscheduled rate reductions in March and April.

The bank will take further surprise decisions if necessary, Diaz de Leon said.

Other analysts are also pessimistic about the country’s outlook. Economists surveyed by the central bank forecast a 7.6% slump in the latest survey, while the International Monetary Fund sees Mexico as the weakest among major Latin American economies this year.

© 2020 Bloomberg

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