Economics: Prospects Mixed, But Lifted by the Recapture of a Drug Kingpin

MEXICO - Report 14 Jan 2016 by Mauricio Gonzalez, Guillermo Valdes, Esteban Manteca and Ernesto Cervera

Fall indicators have generally been mixed. Several released in December suggested a strengthening economic direction for Mexico, including a slight sequential firming of the leading indicator for October. This was the first positive result from this indicator for 14 months, largely reflecting a firming of manufacturing employment. Gross fixed investment grew by a real 5.3% in September in its original series, an improvement over its 2.8%% rise in August, and its 4.3% rise in July.

Other signs are less auspicious. Industrial activity grew at a 12-month rate of 0.5% in October, due mainly to steady contraction in mining, and slowing manufacturing growth (+1.2%). And the National Association of Supermarkets and Department Stores said same-store sales at affiliated retailers grew by only a real 3.7% in November, the weakest in five months. Even less promising, consumers and producers alike are increasingly downbeat about the future of the Mexican economy. After unexpectedly weakening in November, the Consumer Confidence Index fell 0.6% in December, the third month of negative results in 2015. All three components of the Producer Confidence Index (ICE) also showed greater pessimism for December, led down by a 2.4 point drop in confidence in the construction sector.

The outlook is murky. Near the end of 2015, there was consensus that international economic risk had improved, despite continuing risk of international market turbulence, continued falling oil prices, further economic slowing in China and a possible slump in U.S. manufacturing. Yet all of these risks have intensified during the first 10 days of January, and their persistence could hit Mexican GDP growth, and lead to greater financial instability.

How Mexico’s principal political actors deal with the 2016 political agenda will mainly determine the success or failure of two processes begun in 2015: effective implementation of anticorruption reforms, and solving the political crisis. This year’s agenda will focus on the work of Congress, state and local elections, and the implementation of constitutional reforms.Voters in 13 states will elect state and municipal representatives on June 5th; in 12, they’ll also elect a new governor. The results will depend largely on the opposition’s skill in building alliances, and the level of public discontent with incumbents. If people don’t see alternatives, they may increasingly tap independent candidates.

It remains to be seen whether the Peña administration will work with Congress to advance progress in implementing the new anticorruption system, or whether it will gut that reform effort. The government must also address serious problems in public security, including a dysfunctional system of state and local police forces, points on which Congress has made limited progress over the past six years, and from which the Peña administration has been largely absent.

The recapture of drug kingpin Joaquín “El Chapo” Guzmán, six months after his escape from a maximum-security prison, is a feather in the government’s cap, and offers it some breathing room in political and anticorruption reform progress. The main question is whether the Mexican government will yield to U.S. efforts to extradite him.

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