Economic data is positive but needs to improve, while the presidential race remains between AMLO and Anaya
Economic results and broader developments were generally positive over the past month. However, while numbers largely remained in the black, they could not hide the fact that growth has continued to slow and in some cases revealed outright contractions, even as inflation has failed to decelerate as much as had been expected, and the broader context is marked by considerable uncertainty.
Mexico’s index of industrial activity registered a 0.3% annual decline in output for January, in a resumption of the negative trend of recent months, with the exception of a single basis point uptick the previous month. The construction and utility sectors showed growth, while extractive industries and manufacturing output contracted. Gross fixed investment expanded only slightly in December while falling on average during full-year 2017, largely as a result of contractions in the construction sector and extractive industries, and a 1.5% expansion of investment of investment in machinery and equipment. There was a notable slowing in all aggregate demand goods and services components in 2017 that was especially pronounced in the case of exports and government consumption, with the latter experiencing outright contractions during the fourth quarter compared to the same three months a year earlier. Private consumption was the only component that showed only a modest contraction.
Inflation in Mexico has proven to be more stubborn this year than monetary authorities had earlier projected, and additional pressures are looming, prompting both Banco de México and analysts to raise their inflation intervals for the current year and next. Current conditions point to Banco de México's maintaining a tightening bent and possibly raising rates by a quarter of a percentage point, and possibly by a full half point, even though real interest rates in Mexico are among the highest in the world. This should help to reduce inflation pressures arising out of increased demand by raising the cost of credit and slowing consumption and investment decisions. The obvious downside to such an approach would be to slow productive activity, which further complicates the outlook for the central bank’s next policy moves.
On the electoral front, the most recent survey of registered voters conducted by GEA and Investigaciones Sociales Aplicadas (ISA) showed Andrés Manuel López Obrador as the only major candidate to pick up significant support compared to three months ago (+4pp from 23 to 27%) while support for Ricardo Anaya was unchanged (23%) and José Antonio Meade edged only a single point higher to 20%, even as potential independent candidates lost a combined ten percentage points.
We have yet to see any reason why Meade could shake off the dead weight of the PRI’s badly tarnished image among voters and start to motivate voters beyond the most hard core PRI loyalists, so at this point only Anaya is in a position to seriously challenge current frontrunner AMLO. An analysis of second preferences in the presidential race (15% of those surveyed who have settled on a candidate indicated that they might yet change their minds) suggests that if it should become increasingly apparent that the PRI nominee no longer has any serious chance of victory, Anaya would at this point stand to pick up the greatest support from among those who might rethink their choice of candidate.
However, in such a scenario Ricardo Anaya would need to considerably strengthen his campaign effort, convincingly dispel accusations he engaged in money laundering as part of a series of real estate deals and give more voters something to get excited about.
While the latest poll determined that voters largely have been unmoved by the accusations against Anaya to date, a new wave of adverse news and accusations against him could eventually erode support for the nominee of the For Mexico in Front coalition.
Moreover, he must come up with more convincing proposals and hone his communications strategy, especially the messaging directed at youth, a segment of the voting public that leans most toward López Obrador: 42% of citizens in the 18-24 demographic say they will vote for AMLO and only 31% for Anaya.
But if Anaya fails to build a stronger campaign and more effectively convey his message, then López Obrador will be on his way to the presidential palace and perhaps with an even wider margin of victory.
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