Poverty Rises as Economy Slows

MEXICO - Report 05 Aug 2015 by Mauricio Gonzalez, Guillermo Valdes, Esteban Manteca and Ernesto Cervera

The news isn’t all bad: Consumer confidence has rebounded, the stores are reporting increased sales, and industry continues to hire. But the economy continues to slow, recent indicators show. And on balance, the latest news has been negative.

The monthly GDP proxy (IGAE) showed activity slipping in May to its lowest growth rate since August 2014, as the economy expanded a mere 1.5% y/y. Though commercial and agricultural activity grew faster, the broader slowdown came in response to the first outright contraction in industrial activity in 13 months (-0.9%), pushed lower by the poor performance of extractive industries (-8.0%).

This softening tandems with a more concerted fall of business sentiment into pessimism. Producer confidence continues to deteriorate in all three broad industries tracked by the national statistics office’s Business Confidence Index. The setback is especially pronounced in perceptions of the economy, and over whether this is a good time to invest in one’s business.

Further complicating matters is the worsening state of public finances. Rising shortfalls in both petroleum income and non-petroleum tax revenues persist, even as government spending keeps increasing – with no evidence of the cuts officials announced in January -- and the debt of state productive enterprises has soared, driving federal public sector costs even higher.

The initial round of bidding on energy reform, involving shallow water oil fields, proved disappointing: only two of 14 blocks up for auction were awarded. So no relief is likely from those quarters in the foreseeable future.

Data for 2014 showed that current household monetary incomes fell 3.1% including transfers, and 0.9% without transfers, as the wage mass was flat in 2013, and contracted 2.3% in 2014. Furthermore, though extreme poverty dipped, the percentage of people living in poverty climbed last year. Mexico and Chile now alternate as the most economically unequal OECD members.
Security conditions have worsened nationally this year, with rates for the most serious crimes of intentional homicide, kidnapping and extortion rising. Enrique Peña Nieto administration officials have from the beginning pursued a strategy of deemphasizing crime. That led the public to conclude that officials were doing a better job of managing crime than they really were. But, three years into this government, the lack of a firm crime-fighting strategy has harmed public security, and led to unprecedented public disapproval. The recent escape of Chapo Guzmán from prison certainly hasn’t helped. The daily Reforma recently reported that Peña’s disapproval ratings had fallen to a nadir, of 66%.

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