The economic picture gets complicated, while corruption is front and center in the electoral race
The economic data released over the past month provides growing evidence that the Mexican economy continues to lose steam. GDP growth slowed to 1.5% in the fourth quarter. Industrial activity was practically flat in December, and rose only 0.6% during full-year 2017 as construction and manufacturing sustained momentum while extractive industries continued to offset such growth.
This slowing, which could prove to be more pronounced than originally estimated, may come largely as a result of a further weakening of aggregate demand components. Wholesale activity fell 3.8%, and retail sales declined an annual 1.2% in December, led lower by a substantial drop in those of automotive vehicles, and at major retailers.
As had long been expected, inflation has begun to ease, but not as fast or by nearly as much as had been assumed. Moreover, the consumer price index remains well above Banco de México's +/-3% target, and the price trajectory through the first month and a half of 2018 is inconsistent with bringing inflation back below 4% by year's end. This has prompted the central bank to continue tightening monetary policy, with the possibility of more interest rate hikes to come. We at GEA look for consumer inflation to conclude 2018 around 4.3%.
The central bank's most recent monthly survey of private sector economists showed that on average they lowered their 2018 GDP growth forecast from 2.30% in December to 2.28% in January. At the same time, we stood by our estimate that GDP will grow 1.9% this year.
Though there has been some progress on the public finance front, spending cuts remain heavily weighted toward physical investment, and the trend is now toward a shrinking of tax revenues in an election year in which spending is likely to grow considerably, setting up conditions for a further expansion of public debt.
Moreover, the Mexican economy is facing a growing list of risks, including the forex and financial market turbulence that can accompany the Nafta renegotiation, especially at a time when talk of trade wars is afoot.
On the political front, even now that campaigning is prohibited for another month, it is becoming increasingly evident that corruption will be a central theme of the presidential contest. And even as all the contenders try to fashion themselves as the person who will rid Mexico of corruption once in office, it is obvious that there will be more than enough fodder with which to tarnish all the major - and even some lesser - presidential campaigns with graft and embezzlement accusations. However, the extent to which the contending camps wield a plethora of mutual recriminations serves to highlight the degree to which corruption has permeated Mexico's political class and just how difficult it would be to uproot it.
All three major campaigns had at least a major brush with scandal in the past few days. PAN-PRD-MC presidential nominee Ricardo Anaya was at the center of the most widely covered case, as new allegations arose regarding some questionable real estate dealings by the candidate and his relatives that were first reported last August. Anaya has been slow and at times confusing in responding to this story, which has become increasingly complicated by the Office of the Attorney General's taking such an active interest and leaking videos in the case despite the absence to date of any prosecutable offense against Anaya.
Those actions leave the clear impression that the authorities are using the criminal justice system for their own partisan interests while showing little-to-no interest in pursuing much longer standing corruption cases involving officials in the current PRI administration. Such overreach can boomerang on the governing party and its candidate José Antonio Meade, who has been tied to some of the growing list of corruption cases the Supreme Auditing Authority has been building against numerous officials and government departments.
Frontrunner Andrés Manuel López Obrador has also experienced some blowback of his own from his growing list of controversial choices of collaborators and candidates, including an exiled labor leader accused of corruption and a business tycoon who is among AMLO's closest associates who was the target of a scathing column in the Wall Street Journal that accused him of dirty business deals.
Meanwhile, the public is left with yet another election campaign marked by promises of a crackdown on graft that never seems to materialize and that seems ever more elusive.
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