Economics: Sentiment and investment dichotomy
Indexes of business confidence for March and of gross fixed investment for January showed negative results last week. But readings of sentiment and actual fixed investment significantly parted ways as far back as 2013 and as recently as 2015, a period in which business owners grew increasingly pessimistic even on the question of whether it might be a good time to invest, and yet continued to pump more capital into their businesses.
We attribute the erosion of business optimism in this period to adverse changes to fiscal policy along with the extent of the breakdown in the rule of law and security conditions at the same time as employers brace for what the future may hold on the level of the foreign exchange rates, export demand, and the extent of government spending cuts. But even as they indicated that they were growing increasingly reluctant to invest in such an environment, the lure of a more promising long term outlook combined with easy access to international credit markets helped to sustain growth in gross fixed capital formation over the past two years.
Meanwhile, the strength of manufacturing exports in 2013 and 2014, and of the internal market in 2015 probably motivated increased capital expenditures to expand manufacturing facilities during the first two years, and to bolster the commercial sector in the most recent year. However, capex has slowed so far in 2016 as it becomes more difficult to issue debt on international markets and the depreciation of the peso makes it more expensive for businesses to acquire imported machinery and equipment. In this week’s “Economic Outlook” section, we analyze trends in investment in machinery and equipment, and in business confidence during the past three years and the first months of 2016.
Last week’s economic news in Mexico was mixed, with supply-related numbers looking stronger and those associated with demand moving at a slower pace. Industrial activity grew at a 12-month pace of 2.6% in February, the strongest expansion in 14 months. That improved result reflected a stronger performance by the manufacturing (+3.9% year on year) and construction (+3.5% yoy) sectors, and while the mining sector sustained its extended contraction, the reduction in activity in February was the least pronounced in 17 months.
The National Retail Association (Antad) reported that same store sales were a real 3.1% higher in March compared to a year earlier, an improvement over real term growth of 2.0% in March 2015, but achieved despite a favorable seasonal effect, and marking a considerable slowing compared to the 12-month growth rates of February (6.5%) and January (5.8%) 2016. Given the extent to which consumption has been the main driver of economic growth in Mexico for some time, the Antad report (along with a series of other adverse indicators that we analyzed in our previous week’s edition) are especially troubling and may foreshadow a broader softening of the economy in the coming months.
Those comparisons are especially relevant because this year’s March sales results should have benefitted from the presence of Holy Week, which in 2015 took place in the month of April. That vacation period is generally characterized by days in which store sales are especially strong.
These local indicators were published the same week as the International Monetary Fund announced that it had lowered its GDP growth forecasts for Mexico to 2.4% for the current year and 2.6% for next year. The IMF had previously estimated 2016 GDP growth of 2.8% and a rise of 3.1% for 2017.
Now read on...
Register to sample a report