Economic Data and Outlook Tend to Brighten; Political Parties Must See a Potential Coalition Path to Victory

MEXICO - Report 01 Jun 2017 by Mauricio González, Guillermo Valdes and Esteban Manteca

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Last month produced evidence of a further extension of the trend toward increased payroll employment that has been apparent in recent years: hiring accelerated anew in the past four months at the same time as we have seen a drop in the rates of joblessness, underemployment and informality. But those developments have not translated into higher wages and benefits or household buying powder. In fact, remunerations have fallen. Nevertheless, and despite rising inflation, private spending sustained its expansion in February as Mexico’s index of private consumption rose at a 12-month rate of 3.8% and an accumulated 3.2% year to date.
GDP grew 2.6% year on year during the first quarter of 2017 as primary activities expanded 6.3% and those in the tertiary sector rose 3.8% even as industrial output decreased -1.1%.

Mexico’s monthly GDP proxy (IGAE) registered a 2% real-term increase in March compared to the same month of 2016. Primary activities grew 5.1% at the same time as the tertiary sector expanded 2.9%; secondary activity was flat for the month.

So even as consumer and producer sentiment remain depressed (the business confidence index for April showed business owners remained convinced that this is not a good time to invest in their enterprises, a sentiment corroborated by the latest GFI data, which showed a 2.5% drop in investment in February), the generally favorable hard data leads us at GEA to estimate that the Mexican economy will grow 2.0% this year as opposed to the 1.66% consensus estimate from the most recent survey by the central bank of private sector economists. In the previous monthly poll, market analysts had predicted the economy would grow by only 1.49%.

Next year’s presidential succession could provide a unique opportunity to begin the job of overcoming the country’s prolonged crisis of public trust and the erosion of the system’s political legitimacy by rampant corruption and the political class’ chronic inability to resolve the most pressing endemic problems of depressed economic growth, poverty and profound social inequalities as well as insecurity and violence.

That task is made all the more difficult by the tenuous nature of the rule of law in Mexico and heightened public distrust of even the electoral authorities. It would be further magnified should next year’s contest produce yet another presidential election in which no candidate emerged with a strong plurality of the vote, much less the sort of congressional presence needed to implement a governing program. Such a scenario would likely aggravate the problems described above if we were to witness a repeat of the prolonged protests and widespread doubts as to the validity of the election results that we have seen in past races.

Though electoral alliances have been significant in the outcomes of previous elections, the risks of a highly fragmented vote remain elevated given that there are nine parties with nationwide ballot status. The three major parties separately carried 94 percent of the national vote as recently as 2000; that share dwindled to only 61 percent in the 2015 midterms.

But the introduction of the mechanism of electoral/governing coalitions could greatly potentiate the electoral appeal and governing power of the next administration. While there theoretically could be more than one coalition on the ballot next year, at this point it appears the most likely prospect would be one led by one of the country’s main parties (PAN) and several minor parties, including what was until recently the predominant organization on the left (PRD).
The battle to build such coalitions will hit its stride after June 5 and must conclude no later than the December deadline for registering them, but while they face many potential obstacles, they could provide the strongest path to victory and shot at effective governance.