Economics: FDI Faces Stubborn Hurdles
Investment turned in a stubbornly weak performance throughout 2016 and the first two months of 2017, which stands in contrast to private consumption, which was the Mexican economy’s dominant growth driver in 2016 and continues to display strength into 2017. Both private and public investment have run up against barriers to recovery this year due to global uncertainty and the higher costs of financing implied by the rise in interest rates, as well as the constraints facing the public sector due to the extent to which public finance has deteriorated.
Non housing construction investment has trended lower under the weight of low levels of public sector spending on infrastructure, at the same time as investment in machinery and equipment experienced sluggish growth as the extent to which the peso weakened during 2016 and the first months of 2017 heightened the cost of such capital expenditures.
The 12-month rate of Foreign Direct Investment (FDI) fell during the first quarter of 2017, but at 7.95 billion dollars it surpassed consensus estimates made at the end of 2016. In this week’s Economic Outlook section we analyze recent trends in the various components of investment.
Last week we saw another piece of evidence helping to explain the weakness seen in investment as the most recent index of producer confidence (May) revealed the latest in a long string of reports confirming the preponderance of pessimism among business owners. Those surveyed said they remain convinced that Mexico continues to face an adverse economic outlook and they doubt things will improve in 2018. In all three sectors covered by the National Statistics Institute’s monthly survey (construction, manufacturing and commerce), respondents indicated that they do not regard this as a time conducive to investing in their businesses.
Nevertheless, some of the other economic news coming out of Mexico was more upbeat. A case in point is the leading index of economic activity, which showed an improvement of 0.18 points in April compared to the immediately preceding month. It was the most significant firming of this indicator since it recorded a 0.20 point rise in January 2010. This sequential firming of the index reflected growth in manufacturing payrolls, as well as positive performances by both the Standard & Poor’s 500 and the Mexico Stock Exchange’s IPC.
The more upbeat reading of the leading indicator came at a time when market analysts and Mexico’s central bank were raising their growth forecasts for the Mexico economy both this year and next. In its most recent survey of private sector economists, Banco de México (Banxico) reported that the consensus GDP estimate for 2017 had risen to 1.97% from a previous 1.66%. The market also looks for a 2.18% expansion of the economy in 2018, whereas it had projected 2.12% GDP growth a month earlier.
Last week Banxico released its latest quarterly report on inflation, in which it also upwardly revised its estimated GDP growth range, although it only did so in the case of the current year. The central bank now expects the economy to grow between 1.5% and 2.5% in 2017, whereas it had projected a range of 1.3% to 2.3% a quarter earlier. It reiterated its 2018 estimate range of 1.7% to 2.7%.
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