Mexico GDP Plummets in 2nd Quarter

Mexico’s economy suffered its worst contraction in decades in the second quarter of this year, but there are signs the recession may have bottomed out, economists said Wednesday.

In a chilling quarterly report issued late Tuesday, the Finance Ministry reported that Gross Domestic Product plummeted 10.5% in the second quarter compared to a year ago--news that jolted Mexico’s stock and currency markets.

The market had been expecting a drop of 5% to 6%, as Finance Minister Guillermo Ortiz had estimated only weeks ago.

“Mexico has not seen a quarterly drop like this since the 1930s,” said Gray Newman, economist at Interacciones Brokerage in Mexico City. “This is much worse than the ‘86-’87 and ‘82-’83 recession” at the height of the Mexican debt crisis.

The depth of the latest recession, partly orchestrated by the government as it slashed public spending and attacked inflation in the aftermath of the December peso crisis, suggested to analysts that the economy may drop even more this year than they had predicted.

The belt-tightening has already carried a wrenching toll in human terms. Around a million people have lost their jobs this year and tens of thousands of small businesses have closed, broken by plummeting sales and non-payable debts.

But economists said the second quarter data also carried a silver lining.

“It shows the political system and [President Ernesto] Zedillo has been able to do more than survive--they’ve managed over the course of one of the most serious contractions in modern Mexican history to maintain relative stability,” Newman said.

He and others said the breathtaking contraction would enable the government to handle public spending with a freer rein in the second half of the year, pumping liquidity into the economy with less fear that it will prove hyper-inflationary.

“We all coincide on the fact that in the second quarter things hit bottom,” said Javier Maldonado, head of macroeconomic analysis at Mexican financial group Bancomer.

In its report, the Finance Ministry noted that unemployment, though it soared in the first five months of the year, may have started to level off in June at around 6.6% of the economically active population.

It said inflation had slowed down, and that a budding $3.88-billion trade surplus would help push the economy into better shape.

The Mexican stock market’s key Bolsa index fell 20.01 points, or 0.79%, to 2502.63. That was off the index’s lows in early afternoon trade, as investors chose to reflect on the hopes of a recovering economy rather than on its bleak recent past.

Share prices fell because investors were “very disappointed,” in Mexico’s lack of economic growth, said Perry Winfield, head of Mexico research at Paribas Capital Markets Group in London. The decline “was much more than anticipated,” he said.

The currency, the new peso, was weaker against the dollar, mostly because foreign investors were taken aback by the GDP performance.