Mexico’s economy continues to struggle as Q3 unfolds, with the economy facing persistent headwinds. The prolonged weakness of the construction sector and continued fallout from tax hikes at the beginning of 2014 are limiting domestic demand. Meanwhile, the US economy’s slow start in 2014 has constrained demand for Mexican exports, though manufacturing exports have shown stronger signs of life after a strong Q2 for the US economy. Consumer spending remains sluggish, with few expectations for a rapid recovery over the short term. The combination of all of these factors has led FSG to revise Mexico’s GDP growth for the year down to 2.3% YOY, from 2.5%.
The government’s ability to execute government spending and structural reforms will be vital for a recovery in the second half of 2014 and 2015. On the reform front, progress on the passage of secondary implementation reforms in the energy and telecom sectors should improve investor sentiment in Q3, while enhanced execution of government spending should boost the economy in the second half. While government spending has been underwhelming through the first half of the year with slow and ineffective execution on government infrastructure projects, other spending commitments have delayed necessary stimuli to domestic demand, derailing a recovery for the construction sector among other industries.
In our latest quarterly market review of Mexico, FSG explores three key trends that will have an impact on the business environment and corporate sentiment over the medium term:
1. The private sector is increasingly dissatisfied with Peña Nieto’s government: The private sector is increasingly at odds with the government, with tax increases and poor execution of government spending causing growing dissatisfaction within the Mexican business community
2. Higher taxes have multinationals reconsidering their local manufacturing footprints: Higher taxes and fewer incentives for export manufacturers in border states have multinationals reconsidering their manufacturing footprints in Mexico, with companies seeking to align their local manufacturing presence with the local market opportunity
3. Telecom reforms will increase productivity and investment in 2015 and beyond: Telecommunications reform will likely improve competition within the sector and increase the affordability of telecom services, which will have long-lasting effects on productivity and overall investment in Mexico