An Economic Outlook Less Dire than Expected, But A Tough Road Ahead on the International Front
Economic data over the past month revealed continuing but mostly restrained growth. Mexico’s monthly GDP proxy showed the economy growing at a 12-month pace of 2.4% in November, led higher by gains of 12.6% by the primary sector and 3.4% in the case of services, while industrial activity was largely flat.
The real revenues of non financial service providers grew 0.2% during November 2016, and the number of people employed in the sector increased 0.4%. On a 12-month basis the aggregate revenue index grew a real 7.3%, and industry payrolls expanded by 3.3%.
The data confirm that the internal market remains the Mexican economy’s main growth driver.
In contrast to the Mexican economy’s anemic pace of growth, its labor market has shown a certain degree of strength. For December, the jobless rate came in at 3.68% of the economically active population (EAP), the lowest level for a final month of the year since 2007, when joblessness was reported at 3.52%.
Inflation is emerging as a growing point of concern. Consumer prices rose 4.78% year on year during the first half of January, and while Banco de México has insisted that this spike is transitory, that perspective underestimates the pressure being exerted on producer prices, which soared 8.6% in 2016, as well as those mounting in services, which in the case of core inflation grew 3.02% during the first two weeks of 2017.
There is also considerable uncertainty as to how changes to US trade and tax policy might affect the Mexican economy although there are many reasons to believe that even the implementation of the Republicans' border adjustment proposals might not have the intended effect of significantly changing trade activity in relation to Mexico. This is due to the likelihood of considerable peso depreciation and also to the extent of the fixed investments companies have made over a period of years, which will make a quick shift toward integrating into local value chains in the US non viable. Mexican manufacturing exports to the United States have enjoyed something of a recovery in recent months in response to the weakened peso. In November Mexico’s non petroleum goods exports grew at a 12-month rate of 4.8% as the country continued to gain market share relative to Canada and China.
On the international front, the Trump administration has pursued a highly volatile strategy of aggression aimed at humbling Mexico in its bilateral relationship with the United States, with disregard for the rules and utter contempt toward its interlocutors. In recent weeks Trump has increasingly made clear that he intends to redefine his country’s relationship with Mexico by humiliating and bullying the country into acquiescing to all his demands. This approach was clearly on view as he toyed with the Mexican government by following up each invitation to visit Washington with faits accomplis via his Twitter account and executive orders while complaining that Mexico disrespects the United States. With hopes dashed that personal ties between Mexico’s minister of foreign affairs and Trump son-in-law Jared Kushner might facilitate productive talks, and left with no alternative, President Peña Nieto belatedly announced he had canceled his visit to the US.
This comes at an especially difficult time for Mexico as President Peña Nieto government’s popularity has plummeted to record lows even as the partisan pressures of Mexico’s 2018 presidential campaign begin to mount. But Peña’s decision to cancel his trip produced an almost unanimous display of support domestically as the administration beefs up its negotiating team and strategy, and key cabinet ministers have openly stated that Mexico is prepared to withdraw from Nafta should the US not negotiate in good faith.
Mexico should be betting on patience: to better assess the United States’ full objectives in the negotiations, to help balance the scales with the experience of the Mexican negotiating team, and to exploit to the maximum the United States’ institutional mechanisms that could afford Mexico more bargaining tools while seeking out more allies for its cause.
It will also be necessary to respond to Donald Trump’s strategy of isolating Mexico. The relationship between Mexico and the United States is an unequal one. However, Mexico has very important allies not only in the rest of the world but even within the United States. There is an urgent need to draw on all its creativity, fast-paced response ability, and clear awareness of bilateral relations objectives in dealing with an unfriendly US administration in the coming years.
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