By Anthony Harrup

MEXICO CITY--The Mexican economy suffered in 2020 its sharpest contraction in nearly nine decades despite a second-half recovery from shutdowns to contain the coronavirus pandemic that had brought many industries and services to a near standstill early in the year.

Gross domestic product, a measure of output in goods and services, fell 8.3% from 2019, the National Statistics Institute said Friday. It was the biggest decline in output since 1932 during the Great Depression, and followed a 0.1% contraction in 2019.

The rebound that began in the third quarter continued in the fourth, with GDP in the October-December period up 3.1% in seasonally adjusted terms from the preceding quarter. Industrial production rose 3.3%, and services were up 3% from the third quarter.

"It was an awful year for Mexico and for the world," said Alonso Cervera, chief Latin America economist at Credit Suisse. "The final number was not as bad as we had feared ... but it was shockingly low and underneath that number there are millions of Mexicans who have lost their jobs and savings and who will struggle to recover going forward."

The pickup in the second half was supported by strong export demand, particularly from the U.S. where hefty government stimulus spending contributed to a robust recovery from the second quarter's slump.

Resilience in the U.S. economy also helped remittances to Mexico reach record levels last year, supporting household consumption amid a big increase in unemployment.

Mexico's economy is expected to expand in 2021, but with growth limited by a recent increase in Covid infections that led to renewed restrictions in some states and cities, and by the lack of stimulus spending by the government of President Andres Manuel Lopez Obrador who has given priority to holding down public-sector debt.

"The outlook remains clouded by rapidly rising daily Covid-19 cases, potential delays in vaccination plans, slow jobs growth, and the lack of robust fiscal relief undermining the recovery," forecasting firm FocusEconomics said.

The International Monetary Fund expects that Mexico's economy will expand 4.3% this year, while economists surveyed this month by FocusEconomics project growth of 3.9%.

Many economists pin prospects for this year to the pace at which the country is able to vaccinate people against the SARS-CoV-2 virus and reduce the intensity of the pandemic, and to U.S. demand for Mexican goods.

"Clearly export manufacturing is going to be the main engine of the economy, and assuming that consumption and services stabilize with the application of vaccines, or because there's a certain level of immunity, that would be the other," said Benito Berber, chief Latin America economist at Natixis.

Mr. Cervera of Credit Suisse said the U.S. recovery may not benefit Mexico as much as many expect. "If we don't solve the health crisis in Mexico, it won't matter how much the U.S. economy grows, Mexican companies will continue to suffer," he said.

With the confinement in the U.S. in 2020, there was strong demand for things like TV screens and computers, which Mexico makes, but as the U.S. opens up consumer demand will shift more to services like restaurants, concerts or sports venues, he added.

Tourism and recreation were among the hardest-hit services in Mexico in 2020 as international travel restrictions and social-distancing measures hurt airlines, restaurants and hotels.

Mexico received 46% fewer foreign tourists, implying a 55% drop in revenue or the loss of about $13.6 billion, according to government and industry estimates. Industry executives expect only a partial pickup in 2021, and say it could take two-and-a-half to four years for tourism to return to pre-Covid levels.

"The year doesn't look good, we don't see a significant recovery," said Braulio Arsuaga, president of the tourism business council.

Write to Anthony Harrup at anthony.harrup@wsj.com

(END) Dow Jones Newswires

01-29-21 0914ET