Mexican Economy without Clear Signs of Recovery

The Mexican economy shows no signs of sustained growth and its behavior remains weak. This has been caused in part by a tax reform that took effect this year, along with a slowdown in the US Economy that affected seriously the Mexican exports, according to the leading indicators of an influential group of executives.

The manufacturing index of the Mexican Institute of Finance Executives (IMEF) stood in May at 52.2 points. This is a marginal increase of 0.4% from the previous month, according to seasonally adjusted figures. Meanwhile, the index of non-manufacturing businesses and services decreased by 0.6% to 50.1 points in May, according to stats published by the IMEF.

“The results of both indicators and their trends describe a situation of an economy without clear signs for a sustained and steady growth,” according to the IMEF in its monthly report. But the revival of public spending and exports, investment and domestic consumption are showing some weakness, the IMEF added. “Private consumption cannot recover from the economic slowdown and the impact of tax reform,” explained the institute.

Jonathan Heath, Vice President of the Indicators Committee of the Mexican Institute of Finance Executives (IMEF), believes that the factor responsible for why the Mexican economy has not escaped stagnation was the tax reform, which has played against the Mexican consumers.

The Mexican economy, the second largest in Latin America, has begun to recover after a weak 2013, but at a slower pace than expected. This was true to the extent that the government had to cut its growth forecast for this year from 3.9% to 2.7%. In 2013, the GDP grew 1.1%. This is its lowest rate of growth since the end of the recession in 2008/2009.

“The fact announced by the Ministry of the Treasure is certainly a fact of insufficiency. It is slightly higher than what has been the average over the past 14 years, and that represents a better perspective for growth. But in order to happen structural reforms are required,” Undersecretary Fernando Aportela pointed out at a news conference. “The outlook for industrial production in the U.S. is favorable. It should reflect more dynamism for Mexican exports and this is already being seen by the fact that up until April, vehicle production grew annually by 3.9%,” he said.

Private Sector analysts see an achievable 3% growth in 2014

Jonathan Heath from the IMEF indicates that the decision of the Ministry of the Treasure to cut its growth target for GDP recognizes the weak performance the economy has had in recent months. “There is a set of external and internal factors. The United States grew less than expected in 2013, so there was a fall in demand for Mexican exports, including Mexico’s non-oil exports which are the main engine for economic growth in the country.”

In recent years Alejandro Werner has served as Deputy Secretary of the Treasury and also Director of BBVA-Bancomer. He said there is a high possibility that the bad economic data recorded in Mexico will be reversed, anticipating a “positive surprise”. “When you analyze that the quarterly growth in Mexico has been highly volatile,” he said, “I think that the probability that in the next few quarters we will experience a throwback and have a positive surprise is high. We are monitoring the economy in that way and we believe that the 3% (growth) is logical for us.”

President Enrique Peña Nieto announced six measures to accelerate economic growth during the remainder of the year.

Mexico’s economy is in recession, but it is also going through a recovery process, as there are items, say the experts that are due for a rebound during the second half of 2014.

The Ministry of the Treasure had to cut its growth forecast for this year to 2.7% from a prior 3.9%

The Governor of the Central Bank of Mexico (BANXICO), Agustin Carstens, said that while the most important part of the slowdown in the economy has already happened, a much stronger growth is expected in the second half of the year.

“I think if our economy has hit the bottom in the second quarter we could then probably start seeing the recovery of the economy,” said Jonathan Heath, “It’s basically the fact,” he continued, “that the U.S. and Europe are already getting out of the recession. Last year we also were affected by the Brazilian and Argentinean markets, which decreased the demand for automotive imports from Mexico.”

Investments in infrastructure have been announced by the Government of Mexico for over US$308 billion. These will certainly begin to have positive effects on the economy. “The penetration of a millionaire government spending has already had effects on the economy through this maintenance program in infrastructure. It represents one of the most important incentives for the economy,” explained Raymond Tenorio, Specialist from the Technology Institute of Monterrey (ITESM).

Barclay’s analyst Marco Oviedo said that government spending that has grown about 20% annually has recovered from the low levels recorded during the first months of last year.

If the Congress of the Union approves their legislative reforms in politics, telecoms and energy, a long-term positive impact on the economy will occur. It depends on the time that political representatives take to issue a favorable ruling. “The positive effect of secondary reforms,” according to Eduardo Ávila, an analyst from Monex, “will take time for approval but will then have a noted impact on the economy and also energy. And this is what would give further impetus to economic growth, but there are no secondary laws governing things yet” he said.

Positive data from the U.S. industrial sector, mainly in manufacturing, indicates growth in May, in addition to the country’s trade deficit that shrank 3.6% in March. All this could be very good news for Mexico. “Finally the U.S. had an acceleration of growth and that strikes us favorably in the share of exports and highly supports industry in general,” explained Mr. Ávila, the analyst from Monex.

OECD and the IMF) anticipate growth from 3% to 3.5%.

Although his peremptory demand to adjust the tax reform has not yet been satisfied, the business sector was still optimistic about the six measures announced by President Enrique Peña Nieto. These are the things needed to accelerate economic growth during the remainder of the year.

Adjustments for the flexibility of the U.S. dollar operations along the country’s border, is the first item on the list, Another is an increase in the amount of collateral for loans to SMEs. Also, there is the acceleration of the implementation of public works. Add to the list removal of barriers to exports. Another item is modernization of the social rules for operations directed towards productivity. Also included is the design of a new public policy on hydrocarbons and electricity programs. These were announced by President Peña Nieto as the six axes for acceleration of economic growth.

“These are all good measures. In addition to that, we expect good news with sound secondary laws on energy and telecommunications. Hopefully the economy starts to have a growth rate in pace to finish the year near the 3% mark,” said Juan Pablo Castañon, President of the Confederation of Employers from the Mexican Republic (Coparmex).

The President of the Business Coordinating Council (CCE), Gerardo Gutierrez Candiani, called on lawmakers and political forces to complete the pending reforms by expressing the notion that–“The needs of the country will not wait.”

Current predictions are optimistic regarding expansion because the Government expects a growth of around 3.9%. At the same time, organizations like the Organization for Economic Cooperation and Development (OECD) and the International Monetary Fund (IMF), anticipate growth from 3% to 3.5%. The growth may not go beyond 3%, when the economy should really grow by 6%, according to analysts.

In a nutshell, the structural reforms will not have any effect in the short term, but in the second half of the current administration, it is projected, sometime between 2016 and 2018 that the growth of the economy should be well above 4%, maybe even closer to 5%. For now, however, the IMEF has also cut its growth forecast for the 2014 GDP to a range from 2.5 to 2.8% from a previous 3%