The Day at a Glance | June 26 2020

The Mexican economy contracts 17.3% during April

The Global Indicator of Economic Activity in Mexico (referred to by its acronym in Spanish IGAE) confirmed a 17.3% contraction regarding the Mexican economy in the month of April (-19.7% annual), the largest contraction since records exist (February 1993). The greatest impact was observed in the industrial sector, which fell 25.1% month over month (-29.6% annually), followed by services (-14.4% monthly, -16.1% annually) and primary activities (-6.4% monthly, +2.4% annually). The economy as a whole linked 3 consecutive contractionary months (month over month), but logged its 12th successive months of negative annual rates. The data reflects the virus`s negative impacts and the measures carried out to mitigate its effects on the country`s production activities. In the external sector of the economy, exports recorded their second consecutive double digit contractionary month logging an annual 56.7% setback in May (-20.6% monthly), while imports recorded a slightly more moderate annual setback of 47.1% (-18.39% monthly). With this, the balance of trade deficit rose to 3,523 million dollars (vs 3,087M in April). Negative economic data adds to a null fiscal stimulus on behalf of the government and a negative sentiment among private investors. News sources revealed that Christopher Landau, US ambassador to Mexico, has criticized the federal government`s actions in economic matters, and assured that there is no certainty for there to be new investment in the country.

FED and ECB warnings

After a series of stress-tests on banks` balance sheets, the United States Federal Reserve warned that various financial institutions in the country could reach minimal capital requirement levels in scenarios that draw an extension of the pandemic. The risks that the banking and financial system face remain high, and because of this, the agency has instructed limiting paying dividends at current levels and halting share repurchasing in markets during the 3Q20. Additionally, the FED has requested banks to send their capitalization plans at the end of the year in order to monitor the crisis`s evolution more closely; this is the first time in a decade that the FED requires information from the banking system more than one time in a year. In Europe, Christine Lagarde, President of the European Central Bank, assured that the economy has probably reached its lowest point but warned of the possibility of seeing a second outbreak of the virus and a longer lasting effect on different industries such as tourism, traveling, airlines, hotels and entertainment. This would cause recovery to be limited and different among sectors and countries. She considered that the EU will probably not reach an agreement on July 17th for a much needed fiscal stimulus, date at which a summit is expected to be held in Brussels for a debate regarding the package.

Relief payments will end next month in the US

Data published by the United States Department of Commerce this morning showed a 8.2% rise in consumption expenditure in May, an important recovery after a strong setback in April (-12.6%), although it set slightly below estimates (9.3% e.). Data confirmed what has been recently seen in retail sales figures but the rise may not be sustainable. Americans` income contracted 4.2% during the period, after having recorded an increase of over 10% in April as a consequence of the government`s aid to citizens and the unemployed. The report suggests that cash transfers continued in May, but at a lower rate than what was seen the previous month. Optimism regarding a recovery in recent weeks has deteriorated amidst persistent unemployment and new COVID-19 outbreaks that could weaken consumer confidence. Additionally, the aid received by citizens provided by the government will end on July 31st. If the aid is not renewed in a new fiscal package next month, consumption could weaken.