(Bloomberg) — Mexico’s economy shrank more than expected in the third quarter after new legislation banning labor outsourcing hit the services industry and coronavirus cases surged.
Gross domestic product fell 0.4% from the previous three-month period, more than its preliminary 0.2% drop and the median estimate of a 0.3% fall in a Bloomberg survey. It’s the first contraction since the second quarter of 2020, when Mexico imposed its harshest set of restrictions to tackle the Covid-19 pandemic. From a year ago, GDP grew by 4.5%, according to final data from the national statistics institute published Thursday.
The quarterly contraction halts the recovery of Latin America’s second-largest economy, which is far from returning to pre-pandemic levels after suffering last year its worst recession in almost a century. It also contradicts President Andres Manuel Lopez Obrador, who has repeatedly said the economy is doing well despite his decision to avoid additional public spending to support households and companies during the pandemic.
“Instead of demanding new loans, it seems firms and households are more focused on paying down their debt. That saps growth from the economy,” said Nikhil Sanghani, a Latin America economist at Capital Economics, who described the government’s austerity drive as part of the economic problem. “It could lead to longer-term scars from the crisis.”
Mexico in April passed a law banning most subcontracting in an effort to fight tax evasion and ensure employers cover benefits. The measure helped to boost formal hiring, but hit service companies dedicated to labor outsourcing. The country also saw a jump in coronavirus cases in August, leading to an unexpected drop in economic activity that month.
The services sector shrank 0.9% in comparison to the previous three-month period, while the agriculture and the manufacturing sectors grew 1.3% and 0.3%, respectively.
A separate report showed Mexico’s economic activity unexpectedly declined 0.43% in September from the month prior, compared with economists’ forecasts for 0.3% growth.
“Economic activity is not only losing dynamism,” said Janneth Quiroz Zamora, vice president of economic research at Monex Casa de Bolsa. “For the second consecutive month, it was negative. With that, the time that it will take to recoup the ground lost during the pandemic will extend for various months more.”
Inflation has hovered around 6% for the past few months and accelerated to more than 7% in early November, also hurting domestic demand. Market confidence in the central bank’s ability to tame price increases was dented this week when Lopez Obrador pulled his nomination of former Finance Minister Arturo Herrera to head the central bank. The new nominee is lesser-known Victoria Rodriguez, who is in charge of spending at the Finance Ministry.
The services sector was a major contributor to the downward revision to the preliminary third-quarter data, though economists says the negative effects of the outsourcing law are likely to be temporary. Slower-than-expected in industrial production, reflecting ongoing supply-chain issues, also contributed to the poor economic performance.
(Updates with surprise economic activity decline in September and economist comments starting in fourth paragraph.)
©2021 Bloomberg L.P.
'Miracle on Saint-Laurent Street': Quebec economy sees country's strongest post-pandemic rebound – The Globe and Mail
Quebec’s economy is poised to outperform every other Canadian jurisdiction this year in a remarkable rebound from the pandemic that has put the province on track to record its highest annual GDP growth on record.
The provincial government will spend some of its windfall on cost-of-living bonuses and training programs to help fight the labour shortage and inflation that plagues the province, Finance Minister Eric Girard said during a press conference announcing his fall fiscal update on Thursday.
But the surprisingly strong revenues will also allow Quebec to continue reducing its deficit and debt burden as it continues to close the persistent wealth gap with Ontario that Premier François Legault has made a fixation.
After economic activity declined by 5.5 per cent in 2020, it is expected to bounce back by 6.5 per cent this year, leaving the province richer than before the pandemic, according to government projections. That is much faster growth than the 4.2 per cent expected and slashes $5.4-billion from the projected provincial deficit.
“The economic performance of Quebec in 2021 was exceptional,” Mr. Girard said.
Analysts largely agree with the Finance Minister’s rosy assessment. In a recent research paper titled Miracle on Saint-Laurent Street, Bank of Nova Scotia economist Marc Desormeaux observed that growth of 6.5 per cent would be an “all-time record” for Quebec. It would also outpace Ontario and Canada as a whole, a rare distinction for a province that has traditionally lagged the rest of the country in GDP growth.
Quebec’s rocketing fortunes were fuelled in part by the timing of public-health measures, which the Legault government rapidly eased in the summer of 2020 after the pandemic’s first wave that led to a “staggering” 80-per-cent rise in household consumption in the third quarter of that year, Mr. Desormeaux said. Generous federal and provincial aid also injected life into the economy.
But Quebec’s boom times precede the recent recovery, the bank report points out, with large increases in full-time jobs and wages between 2017 and 2019, along with a household saving rate before the pandemic that was significantly higher than in the rest of Canada. Those strong fundamentals have helped the province emerge from the COVID-19 crisis in good shape, Mr. Desormeaux said.
“There’s a whole lot of momentum in Quebec’s economy.”
In his fall update, Mr. Girard acknowledged anxieties about the twin afflictions of inflation and labour shortages facing much of the Canadian economy. To help Quebeckers with a rising cost of living, he announced single lump-sum payments for low- and middle-income households, amounting to $400 for couples and $275 for people who live alone.
The province will also spend $2.9-billion over five years “to combat the labour shortage” by paying for the training, requalification and recruitment of as many as 170,000 workers, with a focus on the health, education, and engineering and IT sectors.
Despite new spending, strong economic growth allowed Quebec to revise its deficit and debt projections downward. This year’s budget deficit is now pegged at $6.8-billion, fully $5.4-billion less than expected. The province will also be able to reduce its gross debt level faster than anticipated, from 46.8 per cent of GDP in March of this year to an expected 44.3 per cent next March. The acceleration “can be explained by the strength of the economic recovery,” according to the economic and fiscal summary.
The raft of good news has allowed Quebec to play catch-up in its quest to close the wealth gap with Ontario, a goal the Legault government has repeatedly emphasized in its three years in power. Between 2017 and this year, the gap shrunk from 16.4 to 12.9 per cent. On Thursday, the government stated its ambition of eliminating Ontario’s wealth advantage altogether by 2036.
Asked whether that was an excessively long timeline, Mr. Girard pointed out how persistently Quebec has trailed its richer neighbour. “Fifteen years to close a wealth gap that’s been there for almost 100 years, I think that’s realistic,” he said.
Despite the province’s strong showing, some critics charge that it is misspending its unexpected revenue bump. The Conseil du patronat du Québec, a business group, said the work force measures don’t go far enough and that it was surprised by the lack of immediate help finding employees, calling this the “most serious labour shortage in [Quebec’s] recent history.”
While praising the government for continuing on its path to cutting the deficit, Maria Lily Shaw, an economist with the conservative Montreal Economic Institute, said she would have preferred the government to balance the budget sooner.
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How world’s major economies are dealing with spectre of inflation – The Guardian
Canadian dollar firms on improved investor sentiment
The Canadian dollar strengthened against its U.S. counterpart on Thursday as investor sentiment improved and domestic data showed payrolls climbing in September.
The loonie was trading 0.2% higher at 1.2644 to the greenback, or 79.09 U.S. cents, after trading in a range of 1.2640 to 1.2677. On Tuesday, it hit its weakest intraday level in nearly eight weeks at 1.2744.
“The CAD remains at the mercy of external factors and sentiment to a large extent at the moment,” strategists at Scotiabank, including Shaun Osborne, said in a note.
A tech shares bounce helped lift European equities after they hit a three-week low the day before. Investors have worried that a surge in COVID-19 cases in Europe is raising the prospect of lockdowns going into the Christmas shopping season.
The Toronto stock market also gained ground. U.S. markets were closed for Thanksgiving.
Canada is a major producer of commodities, including oil, so the loonie tends to be sensitive to the signal that stocks send about the global economic outlook.
U.S. crude oil futures fell 0.5% to $78.03 a barrel as investors eyed how major producers respond to the U.S.-led emergency oil release designed to cool the market.
Canadian payroll employment rose by 91,100 in September, the fourth consecutive monthly increase, data from Statistics Canada showed.
Floods that wiped out bridges, roads and rail lines in British Columbia will hurt Canada’s economic growth and fuel inflation in the fourth quarter, but the Bank of Canada’s rate-hike timing is likely to remain unchanged, economists said.
Canadian government bond yields eased across the curve. The 10-year was down 1.4 basis points at 1.7649, after touching on Wednesday its highest intraday level since April 2019 at 1.826%.
(Reporting by Fergal Smith; Editing by Daniel Wallis and Jonathan Oatis)
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