Photographer: Susana Gonzalez/Bloomberg

Even Mexico’s 19th Century Dictator Foresaw Today’s GDP Letdown

  • Nation cuts 2016 economic expansion forecast to 2%-2.6%
  • GDP falls for first time in three years on slower services

Poor Mexico. So far from growth targets, so close to the United States.

The variation on the line attributed to former Mexican President Porfirio Diaz, who at the turn of the 20th century pushed through changes designed to boost growth, comes to mind today as Mexico’s government cut its projected expansion for the second time this year. Even as consumers continue to spend, lower oil prices and stagnant export demand from north of the border will put a ceiling on the country’s economy.

The government on Monday cut its growth forecast to 2 percent to 2.6 percent, down from an estimate of as much as 4.3 percent last August. That is a far cry from what current President Enrique Pena Nieto promised when he told investors in New York two years ago that Mexico’s energy-industry opening would boost growth above 5 percent by 2017. Yet after a disappointing first half of this year and the first quarter-on-quarter contraction since 2013, economists increasingly see an expansion of just 2 percent for 2016 as a bit of a stretch (see Barclays, Bofa, Vector).

One particular challenge is the year-and-a-half decline in exports, most of which go to the U.S. Exports to the U.S. peaked at $318 billion in 2014 and are on pace for a second annual decline -- a back to back drop in exports would be the first since the North American Free Trade Agreement took effect in 1994. Although being a top supplier for the world’s biggest economy mostly gives Mexico a tailwind, it’s precisely the close relationship with the U.S. that’s hurting the nation’s manufacturing exports at this time, according to Jonathan Heath, an economist at the Mexican Institute of Financial Executives.

"Bottom line, we are exporting less," Heath said. "The reason for this is we are much more integrated. Our exports have many more U.S. components, and the U.S. has many more Mexican components. The dollar’s strengthening has impeded the U.S. from exporting more, and as a consequence the U.S. is demanding fewer components from Mexico."

The aforementioned president Diaz, who seized power in a coup in 1876, led a push for modernization that attracted foreign direct investment but benefited a small group, eventually leading to a revolution. Historians attribute to him the remark "Poor Mexico. So far from God, so close to the United States."

Approval Ratings

While Mexicans aren’t in revolt in 2016, Pena Nieto’s approval rating has plunged to 23 percent from 30 percent in a Reforma newspaper poll published this month. That is the lowest level since the 1990s as public dissatisfaction with the economy and the government’s response to corruption rises.

At a time when the nation’s low debt load relative to other emerging markets might argue for increasing spending to get the economy going, Finance Minister Luis Videgaray is sticking to his pledge to keep the budget balanced. Fiscal stimulus is also not in the cards as Mexico’s central bank has raised its key interest rate to a three-year high, in part to protect the peso’s stability. Mexico’s fortunes are once again tied to those of the U.S.

Pedro Uriz, a strategist at BBVA Bancomer SA, summed it up in a note to clients: "Given the lack of fiscal scope to stimulate the economy in order for Mexico to grow at a faster pace, it will require an acceleration of the U.S. economy and stronger investment locally."

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