Dariana Tani, economist at Timetric’s Construction Intelligence Center, analyses the Mexico's construction industry outlook.
The outlook for the construction industry in Mexico has darkened since the election of the new US president, Donald Trump.
Immediately, following his election victory in November 2016, the Mexican peso depreciated sharply, and with the US potentially adopting a more protectionist stance on trading relations with its southern neighbour, investors are reconsidering their plans to build up operations in Mexico.
Trump’s threats to impose large tariffs on cars imported to the US have already led a number of carmakers to reconsider their investments and expansion plans in the country.
Notably, Ford has abandoned plans to construct a $1.6bn plant in San Luis Potosí, in the northern part of Mexico. Nissan, meanwhile, has called off a project with Daimler AG in Mexico in which it planned to produce luxury autos, and GM has announced that 450 new pickup truck axle-making jobs will be switched from Mexico to Michigan. Toyota recently revealed plans for investment in its US factories, but did not comment on its Mexico plants.
Trump’s pledges to build a border wall and make Mexico pay for it, deport millions of illegal immigrants and ‘overturn’ the North American Free Trade Agreement (NAFTA) have caused widespread concern in Mexico.
Moves towards a renegotiation of NAFTA will certainly damage Mexico’s automotive industry (Mexico produces 3.3M cars a year, with 82% of its 2.7M exports going to either the US or Canada), but also other economic sectors, given the importance of the US as an export market. This will indirectly suppress the growth potential for the industrial and commercial construction projects, as new investments are put on hold.
Also of great concern for the construction industry in Mexico is the decline in the peso, which has dropped to record lows against the US dollar. Inflation has started to increase in response to the devaluation of the peso, and there is likely to be continued upward pressure on prices for key construction equipment and materials.
According to the latest data from Mexico’s National Institute of Statistics and Geography, construction materials costs were up by 8.1% year on year in November 2016, and in view of the depreciation in the peso since then, there is likely to be further increases in the year ahead as imported goods become increasingly expensive in local currency terms.
Such an increase could result in new projects being put on hold or even cancelled if new cost projections make such investments unviable. The recent move by the government to cut fuel subsidies, which resulted in a 20% hike in petrol prices, has further compounded the problem.
A study by the Mexican Chamber of Construction Industry (CMIC) suggests that the construction sector will slow down in 2017 due to the increase in gasoline prices. The study also suggests that the cost of construction works will rise by 15.5% in 2017, the biggest increase since 2000.
Construction output had already started to slow in the second half of 2016, growing by just 0.02% in the third quarter of 2016 down from 3.1% in the second quarter of the same year, and the outlook for 2017 is gloomy.
The slowdown in the pace of expansion in the overall economy (forecasts for GDP growth in 2017 have recently been revised down from 2.3% to 1.4%), combined with the surge in costs and the potential overhaul of trading arrangements with the US, means that 2017 will be a tough year for Mexico’s construction industry.
* For more information on the construction industry, visit the Construction Intelligence Center.
* Image credit: a katz / Shutterstock.