Despite the uncertainty generated by the change in government and by NAFTA’s renegotiation, investors and the market remain very optimistic, Alexis Milo, Chief Economist for Mexico at HSBC, told the Mexico Automotive Summit 2018 on Wednesday at the Mexico City Hotel Sheraton María Isabel.
“The macroeconomic foundations of the country remain stable, which leads us to think that the economy will maintain the rhythm it has experienced in past years, with moderate growth based on exports, industrial activity and private consumption,” Milo said, adding that HSBC expects the economy to experience growth rates below 3 percent for 2018 and 2019.
Milo said the combination of NAFTA’s renegotiation, which is the most important structural change Mexico’s free trade dynamic has experienced in the past years, and the change of government with the promise to generate a substantial change in Mexico’s political direction, were the two main elements that added to the uncertainty that characterized 2017 and part of 2018.
However, international markets, investors and consumers seem to have shaken off that perspective and appear to have widespread optimism and enthusiasm regarding the future. “In July 2018, after the election, consumer confidence experienced a 15 percent bump, which is the largest increase in confidence we had ever seen,” Milo said. Manufacturer’s confidence also increased in very high percentages.
Milo said the increase in confidence combined with lower inflation rates and a slight recovery in the purchase power of Mexicans, is good news, since it spurs private consumption. “Private consumption has been an anchor of the Mexican economy since 2014. In 2018, it has gained more traction than we expected.”
Aside from private consumption, Milo said that other elements will impact the economy’s behavior, such as exports, manufacturing activity and level of investment. “The depreciation of the Mexican peso has been a boost for exports, making them more competitive. As a consequence, the commercial deficit that the US president complained so much about has increased,” Milo said.
An increase in exports can also lead to a sustained expansion of manufacturing activity, which Milo said had been lagging, especially in the construction sector. “We have seen consistent growth in the construction sector, however, public investment in infrastructure is at low levels.” Milo added that the expectation is that the incoming administration will change this.
Another important element to consider is investment, which Milo said has also been at minimum levels, however, HSBC remains confident that as long as investment maintains the levels reached in 2017, it will be sufficient for the Mexican economy to maintain its current growth levels.
Despite solid macroeconomic foundations, the new government has a challenge to tackle even before it takes office: the budget for 2019. “The first test for the new administration will be to put together an economic package that maintains fiscal balance.”
Even though Milo said that the elements that have generated optimism are not very clear, the Mexican economy continues to evolve favorably. “It is hard to understand the root of this optimism. Maybe it is the renewed perspective of the US-Mexico relationship or the fact that markets do not see a radical change in Mexico’s fiscal policy in the short term. Either way, more than a forecast, today, markets are saying that Mexico’s economy is evolving favorably.”
Mexico Automotive Summit 2018, organized by Mexico Business Events, is also the launch event for the fifth edition of Mexico Automotive Review, a publication by Mexico Business Publishing.