Growth Despite Softer Consumption, in the Twilight of the Administration

MEXICO - Report 05 Sep 2017 by Mauricio Gonzalez, Guillermo Valdes and Esteban Manteca

Economic data released in August showed stronger GDP (+3.0% yoy for 2Q17) even as growth in industrial activity was restricted almost entirely to manufacturing (+4.0%). Cyclical indicators were positive as were readings of private consumption, which sustained its momentum (+ 4.0% in May), led by purchases of imported goods (+9.1%) and to a lesser extent by domestically produced products (+2.4%).

Such numbers have led many to adopt more positive growth forecasts and just this past week Banco de México upwardly revised its GDP growth estimate range for 2017 (2.0-2.5% from a previous 1.5-2.5%) and 2018 (2.0-3.0% vs. a previous 1.7- 2.7%).

Results were generally unfavorable in the specific case of internal sales, whose 1.4% average increase through the first seven months of the year was capped by a 7.3% plunge in July even as Antad sales declined a real 2.3% in a third consecutive month of negative growth.

Gross fixed investment grew a mere 1.1% year on year in May, but that result marked an improvement in relation to the cumulative 1.3% increase registered for the first five years of the year.

Labor market indicators were almost entirely upbeat with unemployment and the rate of informality down, and job growth positive overall, including continuing gains in the manufacturing sector.

Consumer inflation sustained its climb as it surpassed 2000 levels by mid-August, but despite such evidence, and latent concerns about the potential wage-related pressures going forward, the central bank continues to express confidence that inflation will resume a downtrend by December and accelerate its fall over the course of 2018.

Mexico’s external account results for the first half of 2017 showed an acceptable performance characterized by a considerable narrowing of the current account as greater exports and service revenues contrasted with a reduction in foreign direct and portfolio investment inflows. However, we believe such weakness was surprisingly restrained given the considerable uncertainty surrounding the Nafta renegotiation talks.

That factor is weighing on the economy given the extent to which the United States has insisted on a protectionist and nationalist approach that contrasts sharply with the cooperative notes struck by Mexican and Canadian negotiators.

These economic data come at a particularly challenging moment for President Enrique Peña Nieto’s Administration. On Friday, he delivered his fifth and penultimate state of the nation report which marks the beginning of his final 14 months in office, a period in which the most deeply unpopular administration Mexico has experienced this century will focus most all of its efforts on assuring that it will continue to influence policy and the machinery of state for many years to come.

The PRI’s recent national assembly left no doubt that Peña Nieto will be mobilizing every office and resource at his command to assure that his choice of nominee will succeed him in office. Even if he should fail in that endeavor, he has many other ways to assure people loyal to him remain in key positions of power long after his days in public office have come to an end.

Los Pinos will be almost entirely focused between now and July on micromanaging the PRI election campaign along with efforts to keep the opposition divided and wrong-footed, to the exclusion of crucial legislation that has long languished in Congress, largely by the PRI’s design. Even financial and fiscal policy will be kept on a tight leash in the coming quarters in an effort to avoid risk that might adversely affect market confidence and debt ratings, but we can expect officials to unleash a massive spending barrage in the second quarter, just in time to sway voters and largely under the radar of ratings agencies, who will see the hard evidence well after the votes have been counted in July. We might also witness cuts in federal transfers to states governed by opposition parties.

The second route involves extending the presence of the Peña camp in key points of the system as a way to shield themselves from any blowback should the next government be an opposition one. The strategy is to step up efforts to assure that people loyal to Peña and his government occupy crucial positions in prosecutorial offices and autonomous bodies, from which they can influence policy and specific decisions throughout the next, and possibly a second post-Peña administration.

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