Bank of Mexico sees economy shrinking up to 8.8%, outlook hazy

By Anthony Esposito

MEXICO CITY (Reuters) – Mexico’s central bank on Wednesday predicted the economy could contract by as much as 8.8% in 2020 as it hedged its bets with a range of forecasts due to uncertainty caused by the coronavirus pandemic.

Presenting its latest quarterly report, Banxico, as the Bank of Mexico is known, said a recovery was likely next year.

Pummeled by lockdown measures against coronavirus, Mexico’s economy is expected to suffer its biggest contraction in decades this year, with private sector analysts forecasting it will shrink by up to 10% or more.

Banxico upwardly revised its inflation forecasts, in part due to a depreciation of the peso currency, which has fallen by almost 15% against the U.S. dollar over the past three months.

Headline inflation was seen running at 3.5% in the fourth quarter, up from a previous forecast of 3.2%.

Cautioning that forecasts were difficult to make during the pandemic, the bank gave three scenarios for the outbreak’s impact on Latin America’s second-largest economy.

Depending on the severity of the recession, and whether the recovery is V-shaped or U-shaped, the bank forecast 2020 economic growth of between -8.8% and -4.6%.

For 2021, Mexican growth was seen in a range of -0.5% to 4.1%.

Banxico estimated Mexico could shed between 800,000 and 1.4 million jobs in 2020.

“The shocks resulting from the pandemic are significantly and simultaneously impacting economic activity, financial conditions and the inflationary process in Mexico, implying a complicated scenario for monetary policy,” Banxico said.

Since February, the bank has cut the key interest rate, which included two out-of-cycle policy meetings, by a total of 175 basis points to 5.5%.

Goldman Sachs (NYSE:GS) economist Alberto Ramos said Banxico “remains cautions and will likely continue to be prudent in the near-term calibration of monetary policy.”