Mexican presidents tend not to get the economy off to a flying start when they first take office.
The past six leaders saw the economy shrink by an average of 0.4% during their first year, but went on to enjoy growth of 3.5% in their sixth and final one. So likely are governments to enrich their allies at the expense of everyone else that each transfer of power causes investors to hang back until they know where they stand.
So it may not be a shock that Mexico will barely grow in 2019, the first year of Andres Manuel López Obrador's presidency. But economists worry that the malaise might linger this time.
López Obrador rode to power on the back of popular outrage against the status quo. The left-leaning populist wants to centralize power, boost the scope of the state and balance the books — all while hitting annual GDP growth of 4%, "double the growth achieved in the neoliberal period."
The list of headaches is long. Consumer confidence, which rocketed after López Obrador's inauguration, has slumped. Manufacturers are struggling: In the past year capital-goods imports are down by 16% in dollar terms, the biggest drop since the global financial crisis. The pace of job creation has decelerated. Economists have repeatedly slashed growth forecasts.
Not all the gloom is homemade. Exports, once a bright spot, are growing more slowly, hit by sluggish demand in the U.S. And threats from President Donald Trump, first to tear up the North American Free Trade Agreement and then to impose tariffs on Mexico to deter Central American migration, have added to the uncertainty.
But businesses also complain of mixed messages from Mexico's president. He bashes the private sector while his advisers hint that pro-business policies are just around the corner. He scrapped a $13 billion airport that was under construction because he deemed it too pricey; he ordered the renegotiation of a gas-pipeline contract that he thought too generous. In July Carlos Urzúa, the technocratic finance secretary, resigned, accusing the government of indulging in extremism over evidence when making decisions.
The government's fiscal commitments have trapped it in a negative feedback loop, said Gabriel Lozano of JPMorgan Chase.
A budget-surplus target of 1% for 2019 was supported by slashing the pay of public-sector workers, starting with the president. But spending cuts have slowed the economy. Tax revenue has undershot expectations, partly because the budget's forecast of GDP growth of 2% was rosy, and also owing to an exodus of seasoned bureaucrats from the tax-collection agency.
The government has raided half of the 300 billion pesos ($15 billion) in its fiscal stabilization fund to make up the shortfall. Next year's budget is also more optimistic on economic growth than most economists. The government's commitment to budgetary prudence might also waver ahead of midterm elections in 2021. Another year of fiscal disappointment seems likely, and could clean out the government's rainy-day fund entirely.
López Obrador wants to splurge on pet projects, including an oil refinery in his home state of Tabasco and a "Maya train" through the Mexican jungle. With the economy ground to a halt, those plans are not sustainable. Nor, loyalists concede, is his sky-high approval rating. Already he has had to dial back on more generous old-age pensions.
External forces may offer a way out of the mess. The U.S. trade war with China means that Mexico ought to be luring investors looking to hedge against China risk, said Luis de la Calle, an economist. The gap between the Bank of Mexico's interest rates and those of the U.S. Federal Reserve is 6.25 percentage points, bigger than in other countries with an investment-grade credit rating. The government wants to privately finance as many as 1,600 infrastructure projects, which the president hopes will "reactivate" the economy.
A near-term economic boost should also come from a big rise in oil production next year, when private firms start pumping oil under contracts signed as part of the previous government's energy reforms. (López Obrador has not allowed further bidding rounds, though his advisers hint at an opening next year.)
Pessimists fret that there is no opportunity that this government cannot waste. When taking office it could have tackled a fundamental problem: an economic system that enables crony capitalists and prevents small firms from expanding. It could have dealt with worsening violence, or raised poor levels of education. Overcoming all this might have been worth a temporary hit to GDP. The risk is that even if this government gets through its first-year dip unscathed, no payoff awaits.