Economic Contraction and Its Impact on Household Budgets
The Mexican economy experienced a 0.3% contraction in the third quarter of the year compared to the previous three months and the same period in 2024, according to preliminary data from Mexico’s National Institute of Statistics and Geography (Inegi). This begs the question: what does this mean for your wallet?
An economic downturn can potentially lead to increased unemployment levels and a decrease in purchasing power as wages stagnate or fall while prices either remain constant or continue to rise. This, in turn, affects consumption and consequently the well-being of the population.
Potential Consequences
According to Santander, “When an economy contracts, it results in a general reduction of goods and services available in the market: consumption, production of goods and services, and investment all decrease. This leads to layoffs, increasing unemployment, which further reduces consumption, creating a downward spiral.”
The annual decline shown by the Gross Domestic Product (GDP), which measures a country’s economic progress and setbacks, is the first since the first quarter of 2021 when the global economy was still grappling with the effects of Covid-19.
Is Mexico Heading Towards Recession?
Gabriela Siller, chief economist at Banco Base, describes the result as “bad news,” as it increases the likelihood of Mexico falling into recession, which would have a more significant impact on consumers’ wallets.
Mexico is not yet in a recession, as it does not meet the criteria for a deep, sustained, and widespread economic decline. However, it is “highly likely” that the country is heading towards stagnation that could last for several years or even fall into recession in the coming months,” Siller explained.
Several concerning factors are currently at play, according to the expert. Private consumption, for instance, has shown erratic behavior with alternating drops and rebounds each month, making it difficult to identify a growth trend.
Additionally, indicators such as employment generation (below previous years’ levels), the decline and loss of purchasing power of remittances, and deteriorating consumer confidence suggest an economy barely treading water.
“Taken together, these elements paint a picture of low and fragile growth, where the line between stagnation and recession becomes increasingly thin, directly affecting household budgets,” Siller stated in a conference.
Recession Impacts
In a recession, adverse effects manifest in various ways: unemployment requests increase, spending patterns change, sales slow down, and economic opportunities diminish, according to the Universidad Panamericana.
“Recessions are marked not only by a fall in GDP but also in real personal income and sales and manufacturing production, along with an increase in unemployment rates,” the institution explained.
Key Questions and Answers
- What does the recent economic contraction mean for Mexican households? The potential consequences include increased unemployment, reduced purchasing power, and decreased consumption, ultimately affecting the overall well-being of the population.
- Is Mexico heading towards a recession? While not yet in a recession, the recent economic slowdown increases the likelihood of stagnation or even a recession in the coming months.
- What factors suggest Mexico’s economy is struggling? Erratic private consumption, declining employment generation, reduced purchasing power of remittances, and deteriorating consumer confidence all indicate a fragile economic situation.
- How does a recession impact households differently from an economic slowdown? A recession typically involves a more pronounced decline in GDP, real personal income, sales, and manufacturing production, along with a significant increase in unemployment rates.
