A New Problem For Mexico: Consumer Confidence Crashes To Record Low

While the biggest threat facing Mexico, and its unpopular president Enrique Pena Nieto, in the past month has been President Trump's insistence on building a "Massive Wall", which Mexico would pay for, as well as Trump's threats of renegotiating NAFTA, today we got a fresh reminder that America's neighbor to the south has another looming problem: a rapidly deteriorating economy coupled with surging inflation on the back of the recent 20% price hike for gasoline, which culminated in a record crash in Mexican consumer confidence.

While the whisper number was 84.9, and the survey said 83.5 the actual print came in at an unprecedented 68.5 (69.3 seasonally adjusted) the lowest print on record. Consumer confidence posted a broad based and extraordinarily large 17.9% mom decline in January (-25.7% yoy), and has now declined in 7 of the past 8 months. The aggregate consumer confidence is at the weakest level since the series began to be reported in April 2011.

Significant declines were recorded across all of the five confidence sub-indices. Furthermore, consumers become more negative about both the current and expected personal and, in particular, the overall economic picture. The index measuring the current situation of the individual household posted a 9.7% mom sa decline and the index measuring perceptions of the future situation of the household declined by an even larger 15.6% mom sa. Furthermore, the index assessing consumers’ perceptions of the current economic picture posted a large 22.6% mom sa decline and the forward-looking index assessing expectations with regards to the outlook for the economy posted a 23.6% mom sa decline. Finally, the index measuring the current capacity of households to buy durable goods compared with a year ago posted a 23.5% mom sa decline.

The sharp decline in consumer confidence reflects the surge in inflation in January driven by the very large double digit increase in gasoline and gas prices, which triggered several episodes of public social discontent, as well as ongoing concerns about Trump.  As Goldman warns, weakening consumer and business confidence is a source of growing concern about the outlook for real activity as it turns consumers/households more defensive (increases precautionary savings and reduces the appetite to buy durable goods) and through it undermines the hitherto strong buoyancy of private consumption

As Bloomberg adds Mexico’s consumers have been propping up growth for the past couple of years (and contributing to the current-account deficit). Retail spending accelerated to a seven-year high in the 12 months through November. Today's plunge will surely impact retail and banking stocks and feed through into rate expectations, sending shopper on the "back foot."

The number is likely to drop further: Mexico's annual inflation shot up in early January to 4.78%, its fastest pace in over four years, stoked by a government-led increase in gasoline prices. Consumer prices are seen rising to over 5.2 percent this year, according to a central bank poll published this week, a move well above policymakers' upper limit of 4 percent that will likely fuel further interest rate hikes.

Trump's victory has sent shock waves through Mexico, threatening to upend years of cooperation between the neighboring countries. U.S. threats to rip up a free trade deal with Mexico cast a chill over company investment plans, while worries of slower growth and inflation could hit private spending.

"The fall in consumer confidence is directly related with Donald Trump taking office, and his threats toward Mexico, but it's also affected by inflationary pressures," Gabriela Siller, of Banco BASE, said in an investor note.

No matter the cause, unless the rapid plunge in public sentiment is arrested Mexico will have greater problems than just Trump to deal with in the near future, including political turbulence which could sweep the current regime from power, leading to a power vacuum at a time when Mexico is most vulnerable to pressure from its far more powerful neighbor to the north, giving Trump free reign to make even more aggressive demands, resulting in even further public anger on the ground in Mexico, until eventually something snaps.