Economics: Signs of further slowing

MEXICO - Report 25 Jun 2018 by Mauricio Gonzalez and Esteban Manteca

Aggregate supply and demand data through the first quarter of 2018 showed stronger-than-anticipated growth, thanks largely to a 6.4% jump in public investment that snapped a three-year streak of sharp declines. The marked rise in public investment is explained by increased government construction outlays, which according to the national construction firm survey, was evident in all segments, but was most pronounced in the case of building. Unfortunately this recent rebound in public construction, including on infrastructure, falls far short of what the country needs to expand productivity and GDP over the long term. Private construction investment sustained its negative trend by contracting 2.4%, and private consumption, which in the past two years served as the main driver of aggregate demand, slowed.

The results recorded for the various demand components were generally in keeping with our estimate at GEA that GDP will grow 1.9% during 2018. This is based on the assumptions of a relative stalling of investment during the remainder of the current year, private consumption's losing steam, and inertial growth in exports at rates of roughly 2% for the year.

We project Gross Fixed Capital Formation will edge only slowly higher in the absence of any significant reactivation of public sector construction, and that growth in private construction will remain very weak in its non housing segment alongside a loss of momentum in the relatively fast pace of growth we witnessed in recent years, which was fed in part by low interest rates.

We also forecast a continuing deceleration trend in private consumption for the balance of the current year, with inflation remaining above 4.0%, average real wages flat-lining, and diminished growth in consumer credit in response to higher interest rates and heightened risk perception both at home and globally.

The likelihood of accelerated spending on infrastructure and programs to expand disposable household incomes by the next government could have major short-term implications for public investment and private consumption, as could its attitude toward the energy reform, which could also impact FDI in the coming years.

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