A Booming Middle Class Is the Secret to Mexico’s Economic Growth
The global economy hasn’t found much traction in 2012. Europe’s debt crisis remains unresolved. China’s rapid economic rise is plateauing, and, depending on who you ask, it may even be petering out. US growth is expected to be a middling two percent this year. Yet Mexico is growing at a much faster pace than it has over the past decade.
Currently, much of that growth owes to robust exports. Car and car parts are being sent to the United States at record levels, the aeronautics sector is burgeoning, oil prices are relatively high, and Latin America is a fast growing market for Mexican goods.
As I argued in the lead up to Mexico’s presidential election in June, the economy could easily sustain 5 percent growth in the years ahead. President-elect Enrique Pena Nieto is eyeing 6 percent growth over the medium term. A clutch of reforms would need to be enacted for this to occur, especially privatization of the state-run oil company, Pemex, but there are already inklings in this direction.
Eyeing these trends, economists at Nomura Securities, a banking conglomerate, have created a stir by predicting that Mexico could surpass Brazil as Latin America’s largest economy as soon as 2022. While that’s certainly possible, a more realistic scenario would involve Mexico growing at the upper end of the growth range the IMF has set for it—4.75 percent—while Brazil might grow at the lower end of its IMF growth range—2.75 percent. In this case, Mexico’s economy would eclipse Brazil’s in 2028 or 2029.
By focusing on exports though, an emerging driver of the Mexican economy is being overlooked—the country’s swelling middle class. The Organization for Economic Cooperation and Development deems half of Mexico’s population of 110 million to be middle class. Roughly 65 percent of Mexicans identify themselves as middle class, according to a poll conducted earlier this year. In 2010, the income of the average Mexican was almost $14,000.
In several ways, Mexico’s middle class bucks the global trend, which may help to explain why forecasters routinely overlook it as a source of economic growth. Rich countries are undergoing a “shrinking middle,” with unionized labor losing ground to nonunionized competitors, and with tight credit standards hampering small businesses and homeowners from getting the loans they need to expand operations or refinance their mortgages.
Much remains unknown about Mexico’s middle class, as it emerged just over the past 15 or so years. For instance, a recent research note by McKinsey, a consultancy, suggests that when times are tough Mexico’s middle class adapts simply by buying less, not by foregoing quality labels for cheaper ones, in stark contrast to America’s middle class. At the same time, Mexicans rely less on credit than their middle-class brethren in Brazil, but they save less of their incomes than do the Chinese.
While defining Mexico’s middle class may be more difficult than in a country like the United States, Shannon O’Neil at the Council on Foreign Relations has laid out what seems like a fair metric. Middle class Mexicans possess the “six C’s”: casa propia (one’s own house), car, cell phone, computer, cable TV, and trips to the cinema.
Perhaps the particular demands of the middle class will become clearer over the coming months, with the advent of a new TV program premised on entrepreneurs pitching ideas to potential investors. Based on the popular BBC reality show “Dragon’s Den,” the pilot for “Arena Titans” is scheduled for production in Guadalajara in September.
Of course, things aren’t all rosy. Headwinds in the global economy are affecting Mexican consumers just like those anywhere else. But two signs in particular point to the resilience of Mexico’s middle class. Reuters recently reported that Mexico’s industrial output rose 1.3 percent from May to June, the largest such increase in nine months. Burrowing into the numbers unearths some interesting trends. Mining output ticked sideways, while activity in the utilities sector actually went down; these two sectors are becoming less prominent features of the Mexican economy. Construction activity, by contrast, provided the pep, which Reuters attributed to “solid domestic demand.” Second, retail sales in June were up 5.6 percent over the previous twelve months, including an uptick of 1.8 percent in the previous month alone. Given these signs, it’s no surprise that consumer confidence in Mexico is at its highest point since 2008.
As its middle class grows, a new era of economic development is taking shape in Mexico.