Economy Extends Stalling Pattern, while Parties Mull Congressional Priorities
The economic indicators published in August deepened the predominately negative readings of recent months, as continuing signs of weakness extended to the consumption sector of the Mexican economy. Just this past week the revised Gross Domestic Product results for the second quarter showed a seasonally adjusted rise of 1.5% compared to the same three-month period of 2015, the lowest recorded in nine consecutive quarters. It also confirmed the trend toward a stalling of economic activity consistent with our own estimate at GEA of 1.9% growth for the current year.
Industrial activity grew a seasonally adjusted 0.3% year on year in June under the weight of the ongoing contraction of extractive industries (-5.7%), while manufacturing output grew only 0.8% yoy.
Business confidence weakened in July in the construction, manufacturing and commercial sectors, and consumer confidence fell 3.0% as consumers grew markedly more pessimistic about how Mexico’s economy is likely to perform in the next 12 months (-11.4% year on year) and how they perceive the economy has evolved in the last year (-5.1% yoy). This erosion of sentiment is already apparent in consumption indicators, which continue to show growth but at a considerably slower pace than in past months.
Moreover, there are concerns with regard to the health of public finance despite the government's making good so far this year on promises to boost revenue and cut spending (the deficit for the first six months was almost 70% lower in real terms than a year earlier). But when we strip out one-off transfers from Banco de México the deficit is similar to that of the first half of 2015, and net public debt grew a real 7% during the first six months of this year. Those results, combined with a slowing economy, underpin Standard & Poor’s decision to lower its outlook on Mexican sovereign notes from stable to negative.
The session of Congress that gets underway this week is significant not only for the heavy load of pending legislation and appointments/nominations to be dealt with, but also because it is the penultimate one in which senators and deputies from the various parties can make changes to the rules governing the presidential contest ahead of the 2018 elections.
So far there is a lack of overlapping priorities across the multi-party spectrum, which doesn’t bode well for progress this fall, especially now that the contest between the opposition and government has fully migrated to the legislative arena. The PRI appears somewhat on the defensive, having already jettisoned the president’s proposal for a marriage equality amendment to the constitution, but it and the other major caucuses are looking to tweak past reforms and finalize laws related to the anti-corruption and public security enforcement systems.
There is also a long list of pending appointments and confirmation votes, some of major importance given the responsibilities that the people are to assume (including heads of ministries, regulatory bodies, the electoral court, etc.) and the lengthy terms many of them are to serve. And while the opposition gave President Peña wide berth in choosing people to head up key regulatory and governmental bodies during the halcyon days of the Pact for Mexico, the administration is unlikely to get anything resembling such a free pass now.
The PAN, which rode its anti-corruption discourse to victories in last June’s elections, enjoys a real opening to possibly unite other opposition forces on matters of nominations and legislative agendas at a time when an increasingly cautious administration finds itself with few tools left with which to innovate and promote a legislative agenda of its own. In the process, the PAN could create conditions conducive to building opposition alliances in the 2017 and 2018 elections.
That task will be complicated by the stark differences separating the various legislative agendas, and the risk of getting bogged down in trying to score points regarding legislative formalities, rather than building a common front on key points in ways that can make the government more willing to negotiate and cede ground.
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