Economic Activity Slows in July; Possible Consequences of a Trump Victory for Mexico
Broad readings of economic activity released last month pointed to a significant slowing even in the services and commercial sector, which has long served as the economy’s main growth driver.
The monthly GDP proxy showed the economy growing at a subpar 12-month rate of 1.9% in May as opposed to the normal 2.5-3.0% pace. Worse yet, the preliminary reading of seasonally adjusted data for the second quarter showed Mexico’s GDP growth slowed to 1.4% year on year largely as a result of a 0.5% fall in industrial activity, while both primary sector output and commerce and services reduced their growth pace, from 4.3% to 4.1% and from 3.7% to 2.4% respectively, in a year-on-year comparison. Also, GDP shrank 0.3% compared to the first quarter of the current year, driven by a 1.7% contraction in industrial output and a 0.1% decline in primary sector output; commerce and services were flat (0% QoQ).
Moreover, industrial activity showed only moderate growth in May, and gross fixed investment fell 2.1% in April. During the first months of 2016 internal consumption remained strong, but sales results near the end of the first half of the year appear to point toward slightly weaker consumption growth during the final six months of the year.
Private consumption grew in April at a 12-month rate of 1.2% even as the retail industry association Antad reported that in June the total sales of affiliated retailers increased by a real 5.9%.
If he were to be elected president of the United States, the general political and economic policy implications of Donald Trump’s nativist and protectionist offerings would have the most severe impact in three main spheres: a) trade and investment; b) migration; and c) the situation of undocumented Mexicans as well as that of legal residents and US citizens of Mexican origin or ancestry.
With both major presidential campaigns calling for revisiting the terms of Nafta, the trade pact will remain a hot political topic no matter who occupies the White House next January. An effort to renegotiate the treaty would be a prolonged exercise likely requiring congressional authorization, although given the extent of presidential powers a President Trump could conceivably order an exit that would take full effect within six months, or and/or effectively dismantle it by imposing punitive tariffs on Mexican goods. Either approach could inflict serious harm on the Mexican economy even if those decisions were challenged in the courts. The resulting uncertainty, however, could have stark consequences for the Mexican economy and investment inflows.
His proposals for a border wall seem less viable on several levels. It is largely inconceivable how he could get Mexico to pay for it, and he would have a hard time convincing the U.S. Congress to have U.S. taxpayers foot the bill. Even under the most favorable circumstances it would take years to construct, and its ultimate effect on immigration is questionable. However, he could accelerate the already high pace of deportations, potentially tripling them by 2019, to adverse effect on Mexican security, employment and social stability, especially in the country’s northern border region.
Despite the scale of the risks, the government of Mexico has yet to offer a policy, much less a strategy, for anticipating, minimizing and offsetting the eventual damage on these three levels. The government’s U.S. lobbying and media campaigns are no solution.
The issue is too great and the potential damages too daunting not to call for a broad consultation among all affected sectors, beginning with business owners and the communities of Mexicans living in the United States, in order to define general policies with regard to the country’s northern neighbor, and based on those conclusions develop a defensive strategy once we have a clearer idea of the dimensions of the eventual effects in all spheres.
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