Economics: More Cuts at Last, but More Needed
In a departure from practices of recent years, in which officials promised hefty spending cuts and then failed to implement them, so far in the current year they have fully met such adjustment targets, and then some.
However, a number of doubts remain as to just how sustainable such adjustments are likely to prove, not only in terms of meeting revised targets in public spending and programmed budget balances for the current year, but above all to what extent they will usher in a more extended period of tightening that would correct the imbalances that have been inflating public debt in recent years.
In February a decision was made to lower spending for 2016 by 132 billion pesos, 100 billion pesos of which were to be slashed from Pemex’s budget; 60% of the adjustment was to be on the level of current spending and 28.1 billion pesos to be taken from a number of cabinet level ministries and other bodies. In addition to those cuts, on June 24 the Ministry of Finance announced further reductions to public spending in 2016 that are to total 31.7 billion pesos, and are to be made, in their entirety on the level of the Federal Government with 66% to come out of current spending.
In this week’s outlook section we analyze the extent to which spending cuts previously announced were implemented during the first four months of the year and how this bodes for the effectiveness of the new round of adjustments.
In other economic news last week, aggregate demand grew at a 12-month rate of 2.5% during the first quarter of the current year. The main growth driver was once again consumption, which widened 2.8% and was powered in turn by a 3.3% rise year on year in its private component; public consumption fell 0.4%. Fixed capital formation increased 0.6% during the quarter thanks entirely to a 3.6% expansion of private fixed capital formation that sufficed to offset the 13.7% plunge recorded in public investment. Exports grew 1.4% above levels of a year earlier.
The Global Economic Activity Index (IGAE), Mexico’s monthly GDP proxy, showed the economy growing at a 12-month pace of 3.0% in April as opposed to the 2.1% expansion reported for the same month a year earlier. The economy’s faster pace reflected continuing strength in the tertiary sector, the weightiest in the Mexican economy. Growth in the service sector accelerated to a 3.6% pace in April after having risen by only 2.4% during the same month of 2015.
For its part, industrial production, which is the economy’s second weightiest component, grew at a 12-month rate of 1.9% in April. Growth in industrial activity has been very restrained in recent months, a source of weakness in overall economic activity that has been offset by more robust service sector growth.
Looking forward, we expect continuing weakness in industrial growth supported only by anemic gains in construction and manufacturing. We also anticipate a further extension of the downtrend in extractive industries that has extended through the past two years. We also anticipate growth in commercial sector activity will continue to slow in in the coming months. In light of such factors we expect future IGAE reports will show a further weakening of growth.
Lastly, In response to the United Kingdom’s referendum last week, in which a majority of voters cast their ballots in favor of Great Britain's withdrawing from the European Union, and the international market instability that resulted from that outcome, on Friday, June 23, Banco de México and the ministries of the Economy and Finance jointly announced an additional 31.7 billion pesos in cuts to public spending for 2016 on top of the 132 billion pesos in cuts announced in February.
Now read on...
Register to sample a report