More Cuts at Last, but More Needed, while Teachers' Conflict Takes Government Off Guard
Indicators released last month revealed that key areas of the economy continued to grow at a surprisingly fast pace through the second quarter of the year, but they also pointed to potential signs of weakness ahead. Internal consumption, which has long defended its perch as the main growth driver of the Mexican economy, was powered by a 4.7% expansion in private consumption during the first quarter, and in the January-to-May period sales by retail stores (Antad) and domestic auto sales, expanded 4.6% and 16.8%, respectively. Moreover, key private consumption precursors such as formal sector wage mass, household remittances, consumer credit issued by commercial banks and income from informal sector sources, have sustained their stride during the second quarter of the year.
However, warning signs have begun to appear that raise questions as to just how long this impressive display of internal market strength can be sustained, and the impact that a more adverse international situation could have, especially in terms of inflation and in the labor market, as external demand for Mexican manufactures continues to fall.
There are also concerns about the sustainability of the government’s efforts to scale back spending. And the latest data also reveals areas of the economy are already experiencing outright contractions. The index of gross fixed investment fell at a 12-month rate of 3.0% in March, largely under the weight of a 5.0% drop in spending on machinery and equipment.
Cyclical indicators pointed in a similarly negative direction, as the leading indicator for April once again slipped marginally to 99.4 points, six basis points shy of its long term trend.
Industrial activity grew at a 12-month pace of 1.9% in April. The report marked an extension of the trend of recent months toward a slowing of the rate of expansion, a weakness that has been offset on the level of the headline of industrial activity by continuing strength in the service sector.
Looking ahead, we expect continuing weakness in industrial growth, supported only by anemic gains in construction and manufacturing. We also anticipate a further extension of the downtrend in extractive industries that has extended through the past two years.
Similarly, we expect growth in commercial sector activity to slow down slightly in the coming months. In light of such factors we calculate that future IGAE reports will show a further narrowing of growth.
The government and many analysts were blindsided by the sudden resurgence of protests against the 2013 education reform. After the opposition movement appeared to have lost considerable public support during three years of actions that sometimes turned violent, and mass protest encampments that disrupted life in major cities, the movement seemed to have become increasingly isolated, defensive and almost moribund, lulling officials into trying to mop up any remaining resistance through firings, efforts to kettle street protests in cities, and the recent arrest of two of the dissident teachers’ most prominent leaders. It appears to have been a serious miscalculation.
As the teachers stepped up their actions in recent weeks to include blocking roads in the southeast, thereby seriously affecting the flow of goods and people in and out of the region, a decision to send both Oaxacan state and federal police to deal with roadblocks around the city of Nochixtlán ended in a violent confrontation pitting the police against teachers, other radical-left groups and the townspeople. Though just what happened and who fired first remains in dispute, nine people were killed and scores injured on both sides.
The government was thrown on the defensive, and felt obliged to resume talks with the dissident teachers (CNTE) and their radical-left allies. The government will not reopen debate on its reform, but to extricate itself from the trap it stepped into, it must begin by reestablishing the legitimacy of using force through an impeccable investigation into the events in Nochixtlán, holding accountable those found to be responsible, and adopting stricter protocols on the use of force. It will probably also prove necessary to use some judicial creativity in dealing the arrested teachers’ leaders of CNTE organization in Oaxaca.
Moreover, the government needs to modify its strategic view of the conflict. The education reform is not the central issue in dispute. It is just an instrument with which to generate a crisis of governability in an important part of Mexican territory. The government’s rival is the CNTE, but behind that group lives an ecosystem of radical-left organizations, some legal and others clandestine, that harbor insurrectional objectives. In order to defeat such a strategy it is necessary to strengthen the legitimacy of institutions. On that front the government is losing so far.
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