MexECON Blog

Quarterly Economic Overview - 2014 Q1

In the fourth quarter of 2013, Mexico's inflation-adjusted gross domestic product (GDP) was up 0.7% from the same period one year earlier, after revised increases of 1.4% in the third quarter and 1.6% in the second quarter.  GDP in all of 2013 was up just 1.1%, less than one-third the rate of increase in 2012.  For comparison, Mexico's average annual growth rate from 1992 to 2012 was 2.6%.

To the casual observer, it may appear that the slowdown in Mexican economic growth during 2013 came from cooling international trade.  After all, Mexican exports have basically flattened out over the last year or more, reflecting sub-par growth in the United States.  However, Mexican imports have softened almost as much as exports.  Therefore, net foreign trade has worsened only modestly.   The real problem for Mexico has been a precipitous drop in investment.  Installations of new equipment and machinery rose at a healthy pace in 2013, but that was more than offset by a big drop in construction.  One challenge has been a shift in the government's housing support policies, which put many of the country's homebuilding companies into severe financial straits and brought residential construction to a near standstill.  Another challenge has been tight government spending, which slowed public works projects.  As a result of these challenges, construction output in 2013 was down 4.3% from the previous year.  A second major problem for Mexico is that consumers have slowed their spending dramatically.  As may be expected, the stagnation in exports and the drop in construction activity have weighed heavily on hiring.  Consumers also faced accelerating inflation and the prospect of increased sales taxes beginning January 1.  Mexican consumer confidence has fallen in response, and retail sales in 2013 were down 0.3% from 2012.

For now, Mexican stability indicators remain relatively healthy.  Although the hike in sales taxes helped push inflation higher at the beginning of the year - with the January consumer price index up 4.5% from a year earlier - inflation has already started to moderate, and Banco de México expects it to fall to their goal of 3.0% in the coming years.  The central bank has therefore been willing to cut interest rates in order to support economic growth.  At the end of March, the benchmark rate stood at just 3.50%.  Meanwhile, fiscal policy remains disciplined.  Official data show Mexico's public sector deficit came to 2.3% of GDP in 2013, compared with a deficit of 2.6% of GDP in 2012.  The shortfall is much lower than in most major developed countries.  For example, the Organization for Economic Cooperation and Development (OECD) recently estimated the U.S. deficit was 6.5% of GDP in 2013.  Mexico's public sector net debt (including government-owned agencies and enterprises) stood at 36.9% of GDP at the end of 2013, while the OECD says U.S. net debt stood at 81.8% of GDP.

Capital flows into Mexico remain healthy.  In 2013, foreign portfolio investment (net foreign purchases of Mexican stocks and bonds) came to $48.3 billion, marking the second-best annual total in the country's history, after inflows of $72.9 billion in 2012.  Meanwhile, foreign direct investment (net foreign purchases of land, factories, office buildings, and other hard assets) totaled $25.2 billion in 2013, compared with a net outflow of $5.2 billion in the previous year.  Finally, net inflows from international bank loans and similar transactions totaled $12.5 billion, erasing the net outflow of $10.3 billion in 2012.  Counting other miscellaneous flows, Mexico's total net financial inflow in 2013 came to $58.8 billion, after an inflow of $51.0 billion in the previous year.  With these inflows, Mexico's current account deficit continues to be financed easily, and the country's foreign reserves rose to a new record of $176.5 billion at the end of December.  Despite the good trends, however, investor concern about tighter monetary policy in the United States has weakened the peso.  The currency has trended downward since mid-2013, and at the end of March 2014, it was trading at a spot-market value of $0.07650 (13.07 pesos per dollar).

Looking forward, the Mexican economy could enjoy a modest reacceleration in the coming months.  If the U.S. economy continues to gain traction as recent reports suggest, Mexican exports should strengthen and eventually prompt increased hiring.  Moreover, many Mexicans appear to be adjusting to the higher sales taxes this year, and consumer confidence has been on the rebound, though a robust rise in consumption demand has not yet been noted.  The International Monetary Fund therefore recently forecast that Mexican GDP growth will accelerate from 1.1% in 2013 to 3.0% in 2014 and 3.5% in 2015.  However, there are significant downside risks.  Of course, the long anticipated acceleration in U.S. demand may not materialize.  In addition, the January tax hikes and recent reductions in energy subsidies could weigh on the economy throughout the year.  The government's budget for 2014 includes accelerated spending and an expanded deficit to offset some of the drag, but fiscal policy could continue to be a headwind, as it was in 2013.  Not only could public works remain frozen in the New Year, but residential construction still shows no sign of recovering.

In the longer term, Mexico's outlook is probably more positive.  Mexican competitiveness has improved remarkably since the middle of the last decade, in large part because of surging wages in China, an appreciation of the Chinese currency, and higher international transportation costs.  Now, Mexico's new president, Enrique Peña Nieto, has begun to implement an ambitious reform agenda geared at making the country itself more dynamic and efficient.  The program takes aim at some of the key problems holding back Mexico's growth rate, such as extensive monopolization, limited bank financing, weak investment, and a poorly performing education system.  Critically, President Peña Nieto first crafted a consensus for reform among all three of the country's major political parties.  In the first year of Peña Nieto's presidency, this "Pact for Mexico" produced reforms that promise to toughen performance standards for public school teachers, extend the country's safety net programs, encourage increased bank lending, bring heightened competition to the telecommunications sector, and open the energy sector to private companies.   Nevertheless, it is important to remember that these reforms all ended up somewhat weaker than expected.  To be successful, they also all require additional implementing laws and rules.  One good sign is that the new telecommunications regulator seems to be moving aggressively against the incumbent television and telephone monopolies, but there is still some risk that the overall reform program may not be implemented in full.  In sum, Mexico seems to be moving in the right direction, but more needs to be done before the economy can kick into a prolonged acceleration.

Patrick Fearon, CFA
Vice President, Fund Management

GDP 2013 Q4 - Quarterly Report

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