Is Mexico in a recession? Well, yes … and no. Ever since joining NAFTA, Mexico has operated two economies. Sometimes, the two economies walk in lock-step, but most of the time they are somewhat out of sync, which has proven to be a comforting source of diversification and stability.
The domestic economy, roughly 60% of the total, is driven by consumption, national government spending, and private investment, led by Mexico’s powerful industrial grupos. Consumer and government spending are both tied to Mexican oil production and global prices, both of which are soft at present.
Mexico’s domestic economy is in recession. Some of its demise is owed to external factors, others to a predictable sexenio lull in investment, but also to Mexican investor fear of President López Obrador’s administration. As of May 2019, gross fixed investment in Mexico was down 7.4% y-o-y and dropped 3.2% from January to May, according to INEGI (as per Spanish Instituto Nacional de Estadística y Geografía).
Even if López Obrador, widely known by the acronym AMLO, would like to pursue his most ambitious projects (a high-speed train network, new refineries, government decentralization, an alternative Mexico city airport), he lacks the tax revenue to do so. Furthermore, he is at odds with the Central Bank, which has proudly defended its hawkish reputation in spite of AMLO’s desire for looser policy. No time soon can the national government be a signicant economic lever of growth, fipscally or monetarily, in Mexico.
Cheap oil has been hard on the Mexican peso, but many also speculate that capital ‑ight has weakened the currency. The peso is one of the most liquid currencies in the world, with $90 billion worth traded each day. Thus, it is hard to detect when capital is sent abroad, as allegedly many wealthy families have done since AMLO was elected.
The sole shining light in Mexico’s economic makeup is trade. Exports will grow almost 9% in 2019, thanks to strong U.S. demand and Mexico’s ability to capture manufacturing orders previously sent to China, a trend that may grow in time. In recent years, Mexico has eclipsed Canada as the world’s second largest supplier to the U.S. market and may overtake China if the Trump-Xi showdown becomes more conflictive.
In a recent Americas Market Intelligence survey of Latin American divisional heads, Mexico was named as the second most likely market to disappoint in 2020 (after Argentina). Mexico’s trade economy is vulnerable to: i) a lengthy debate of the USMCA (United States-Mexico-Canada Agreement) by the U.S. Congress; ii) a slowing of U.S. manufacturing (and thus outsourcing); iii) continued weak oil prices.
Mexico’s elites are worried by what they perceive to be the gradual dismantling of Mexico’s institutions. Critics worry that AMLO’s infrastructure projects are money misspent. His cabinet may boast academic credentials, but many lack governing experience. Proposed state-level delegates may undermine Mexico’s nascent democracy. Rumored plans to spend less on political parties and lower funding of the INE (Mexico’s electoral authority) could weaken political opposition. Senior Morena Senator Ricardo Monreal called for expanding the Supreme Court from 11 to 16 justices to help his party infl‑uence the highest court.
Since Mexico first embraced globalization with NAFTA, it has gradually constructed enviable institutions and laws that created Latin America’s most competitive export economy. The question facing investors today is whether Mexico’s economic growth can withstand six years of populist politics and soft oil prices.