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International trade: war in Ukraine and Covid-19

There are headwinds in international trade due to the war in Ukraine and the Covid-19 pandemic, indicates an analysis by Banorte bank.

On the first aspect, Banorte expects that the main effects will come from the reaction of energy and commodity prices, both due to the direct impact of the conflict, as well as the sanctions lifted against Russia to try to dissuade it from the war.

Rising costs will likely hurt the recovery of some sectors even more, with smaller margins for producers and lower real incomes for families.

On the second point, the cases of Ómicron have skyrocketed in China throughout March, with which confinements have been established in some industrial centers (such as Shenzhen) and ports.

International Trade

Specifically, in relation to the latter, the government announced the longest lockdown in nearly two years for the port city of Shanghai for the next nine days.

Banorte expects this to have significant implications for international trade flows and result in a slowdown in production in various sectors.

In this context, it should be remembered that around 20% of imports to Mexico in 2021 came from China, so the distortions may be significant.

In February 2021, the exports of products from Mexico totaled 46,246 million dollars, which represented a growth of 27.8% at the annual rate.

The amount implied an increase of 16% at the intermonthly rate with seasonally adjusted data, its best performance in the last 20 months.

In timely signs, the manufacturing sector in the United States continued to pick up pace in March, with the PMI rising to 58.5pts.

According to S&P Global, the increase was driven by higher production, new orders and employment.

However, backlogs and price pressures continue to increase, albeit also with an expansion in inventories, which may provide some relief in the face of additional challenges.

Mexico entered a recession well before the Covid-19 pandemic, with the economy contracting 0.1% in 2019.

The pandemic hit Mexico hard, and an austere fiscal response contributed to Mexico’s deep economic contraction of 8.3% in 2020 and increased poverty.

The IMF estimates that Mexico’s fiscal support package totaled less than 1% of GDP, the smallest among the G20 and its regional peers, despite modest public debt (61% of GDP in 2020) which is the median between emerging market members of the G20.

 

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