Economics: Middle Class Sustains Consumption

MEXICO - Report 12 Aug 2015 by Mauricio Gonzalez and Ernesto Cervera

Many media outlets have dedicated considerable attention in recent weeks to indicators of Mexico’s middle class in Mexico as part of the broader discussion of recent data confirming a considerable rise in poverty.

Based on the information published by the National Council for the Evaluation of Development Policy (Coneval) regarding the income thresholds at which Mexicans can cover their food and non food needs, and the information that can been gleaned from the ENIGH surveys conducted between 1992 and 2014, the number of Mexican families that live above the wellbeing threshold (food and non food) grew substantially between 1992 and 2006 (by an average +6.9% per year), a stabilized 17 million families between 2008 and 2014.

This behavior implies that the percentage of families in such conditions (that cleared the threshold of minimum wellbeing) has risen from 36.2% of all families in the country in 1992 to 52.7% in 2014.

Moreover, the composition of families that have cleared the minimum wellbeing threshold is associated with the region in which families live as well as the urban/rural and sectorial conditions that determine their incomes. More specifically, those regions where the middle class has greater relative weight are the same ones in which a dynamic sectorial activity has been developed in relation to the industrial export sector or that of formal services. It is precisely in those states where there has been a substantial increase in buying power and a notable improvement in wealth distribution, although on a national level there has been no increase in the number of middle class families during the same period. In this week’s issue of Weekly Trends: Mexico Economics we delve deeper into our analysis of the evolution of the middle class in recent years following the release of the most recent Coneval results.

Last week the authorities also released data on two demand components through the month of May: gross fixed investment and private consumption. Gross fixed investment grew a real 2.3% above levels of a year earlier in the original series, led higher by investment in machinery and equipment, which rose 3.6%, while fixed investment in the construction sector widened a lackluster 1.5%. Overall spending on machinery and equipment registered gains of 6.8% in the case of the domestically produced subcomponent and a mere 2.3% in expenditures on imported machinery and equipment in a possible reflection of the peso’s weakness against the US dollar over the past year.

In contrast to those generally positive originally results described above, seasonally adjusted data showed that gross fixed investment was 0.9% lower than in April due to reductions of -1.1% in construction GFI expenditures, and -0.5% in machinery and equipment.

Private consumption grew at a 12-month rate of 2.8% in May, which marked an improvement over the 2.4% increase recorded for the previous month earlier, but a showing that was weaker than the 3.4% average increase reported for the first quarter of this year. In a direction similar to that of gross fixed investment, consumption growth was mainly driven by spending on domestically produced goods. But in contrast with investment behavior, consumption grew a relatively lackluster seasonally adjusted 0.8% in May compared to April of 2015.

Business sentiment continued to slide deeper into pessimistic terrain especially on the level of investment decisions and the Mexican economy’s prospects going forward. Largely due to the erosion of expectations on those two points sentiment fell 5.4 points year on year in the commercial sector, 4.2 points in the construction industry and 2.9 points in the case of manufacturing.

The Consumer Confidence Index rose 1.8% on a 12-month basis in July, but fell 1.9% on a seasonally adjusted compared to June. The former positive result was powered mainly by expectations of being able to acquire durable goods, the seasonal setback largely reflected increased pessimism regarding the Mexican economy’s current and future performance.

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