Business. Barometer. Survey. pulse survey. The business

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1 Business Barometer Survey The business April 2013 pulse survey 25

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3 Introduction The twenty-fifth edition of Business Barometer offers analyses of the outlook of business leaders regarding current and coming economic conditions, as well as of the early months of the administration led by President Enrique Peña Nieto, including their views on the effects of recent labor reforms on hiring practices in their companies. In general terms, business leaders continue to hold a favorable outlook of the current business context, with the investment climate and availability of credit, outperforming all other indicators during the last quarter of It must be mentioned; however, employment and security scores fell, suggesting that general approval regarding the performance of the economy and government did not spill over to boost these variables. With regard to the future business climate, opinions were more optimistic, though security slipped from the score published in Business Barometer Twenty-Four. It is important to stress the performance of the variable for the current situation of businesses. This aggregate came on unmistakably to the downside, with all constituent variables, i.e., prices, salaries, output, production capacity, profitability and employment dipping since our last survey. In this regard, variables associated with company output, seem to be feeling the effects of deceleration seen during the last few months of 2012 and early months of 2013, especially among companies associated with the export manufacturing and construction. Demand levels faced by companies confirm the scenario described. For the third straight quarter the number of respondents reporting high demand has fallen, though most companies (59%) still report normal demand. Overall, these results allow us to assert that companies are beginning to face less favorable conditions, while operating nonetheless, within a normal demand range. The twenty-fifth Business Barometer also revealed confidence with regard to 2013 year-end inflation. Fully % of respondents have inflation coming in at between 3.5 and 4.0%, very similar to the outlook for year-end This general confidence is also evident in the exchange rate variable, with most respondents suggesting it will remain stable at between 12.5 and 13.0 vs. the US dollar. In terms of the threats to the performance of the Mexican economy, the report finds deceleration of the US economy at 42% followed by insecurity at 39% as the leading concerns among business leaders surveyed. Interestingly, insecurity jumped by ten percentage points since out last survey. In this light, the threat of the slowing US economy and the structural issue of insecurity stand out as the areas in which the government must continue make strides in order to attenuate negative perceptions among respondents. Interestingly, opinion on the performance of the government continued to trend downward, touching points, its lowest mark in 12 months. Improving education and reducing poverty were the only variables that advanced, suggesting that the education reforms and the National Hunger Crusade contributed to a better score for government performance. Business Barometer 25 Introduction 3

4 Most respondents view the early days of the new administration as largely unchanged vis à vis the performance of the Calderon administration, with only 5.0% of respondents saying that things are worse. These results reveal that most business leaders continue to trust the Peña Nieto administration, opining that the government has been focused on creating consensus, something that is congruent with the agreements achieved since the Pact for Mexico was signed. This variable was followed by improvement in the country s image, the economic context and combating corruption. Finally, the survey shows business leaders giving the lowest marks to the variables of reducing poverty and improving public security. In terms of the strategies the government must pursue in the coming months, opinion was divided. Most respondents believe tax and energy reform should be priorities, though 21% of those surveyed believe preventing economic deceleration should be the thrust of government efforts. Finally, the survey revealed that % of business leaders opine that combating corruption is the number one priority, because of the high costs it levies on business activity. Meanwhile, fully 85% of those surveyed opine that labor reform has not exerted any significant impact toward improving economic conditions of business, while only 9.0% think it is a positive driver in the economy. In terms of its effects on hiring, labor reform has not had any significant impact according to business leaders surveyed. Fully 88% of respondents report that these reforms have not affected how they go about hiring, while 9.0% report that they have it. Taken together, these results allow us to assert that in short term these reforms have had very little tangible effect, especially when viewed against the backdrop of the expectations created in the lead up to passage. The twenty-fifth edition of Deloitte Business Barometer, therefore, can assert that business leaders hold to an upbeat outlook for the current business climate and an even better outlook of next year s prospects. Nonetheless, the assessment reveals the situation of businesses trending downward, even as most business leaders surveyed report normal levels of demand. As such, in terms of output, employment, production capacity, salaries and prices, business leaders appear to be somewhat less confident. Insofar as the current situation is concerned, business leaders see economic conditions quite similar to those prevailing during the last administration, with the current government marshaling its strategic efforts in creating political accords in order to promote structural reforms, prevent economic deceleration and combat corruption. At the same time, it appears that business leaders still have not seen any significant impact of labor reform, either in terms of economic conditions of hiring. 4

5 I Business Environment Current Situation The twenty-fifth edition of Business Barometer shows that business leaders surveyed are remain upbeat with regard to the current business climate. The variables of investment climate and availability of credit continued to advance, moving ahead since the third quarter of Likewise, both categories topped marks from one year ago and are the best performing variables for this context. In contrast, the economic situation, employment and security performed less favorably. Specifically, scores for employment have dipped over two consecutive surveys, which stands in contrast to the generally high marks for macro-economics. Similarly, it is important to stress, the economic situation is still viewed as positive, though with somewhat lower marks since our last edition of the survey. This result coincides with the deceleration seen in several productive sectors. Business leaders assessment of security is worthy of note. Even as this marker continues to trend upward, its performance was interrupted in the latest survey, revealing some degree of concern in the business community about how to tackle security issues in order to improve the general business climate in Mexico. Current situation compared with the one in previous year (Average scores in a basis*). * Figures were computed by weighing percentages of responses better, the same or worse by 1, 0.5 and Average Average Security Employment Credit availability Investment climate Economic situation Average Business Barometer 25 Business Enviroment 5

6 Future Opinions of for future prospects came in more optimistically. Of all the constituent measures of the business climate, only security underperformed since the last Business Barometer of In contrast, employment brought home an upbeat score. Evidently, respondents are confident the current sluggishness in the job market will eventually be boosted by the improving business climate in the near term. This generalized confidence among business leaders comes in conjunction with structural reforms aimed at boosting Mexico s economic growth and competitiveness and expected to exert fuller effects in the medium term.. Future situation within one year (Average scores in a basis*) * Figures were computed by weighing percentages of responses better, the same or worse by 1, 0.5 and Average Average Average Security Employment Credit availability Investment climate Economic situation 6

7 II Company Situation Current Situation Interestingly, the current situation of businesses sent very clear signals with all constituent measures prices, salaries, output, production capacity, profitability and employment tailing to the downside since our survey last quarter. These results stand in contrast to the business climate score. Scores for the constituents of productive activity of companies reveal the effects of deceleration in late 2012 and early 2013, especially among companies in export manufacturing and construction. Current Company situation compared with the one in previous year (Average scores in a scale basis) * Figures were computed by weighing percentages of responses better, the same or worse by 1, 0.5 and Average Average Prices Wages Production Production capacity Profitability Employment Average Business Barometer 25 Company Situation 7

8 The score for demand for products and services enjoyed by companies confirms the scenario described: for the third straight quarter, fewer respondent report high demand. While fully 59% of companies report normal levels of demand, this group is made up largely of companies with only moderate purchasing power and which do not necessarily constitute major drivers of economic growth. Nonetheless, the score of business leaders reporting low demand came in unchanged at 17%, something that came be taken as a positive indicator. All told, these results signal the onset of a generally less favorable situation for business, though demand level can still be described as standing within a normal range. Current company demand (percentage distribution of responses) Average Average Low Normal High 8

9 Future The score for the future situation of companies reflects the general confidence of business leaders, though it came in slightly off across the board of variables, with the exception of profitability. In this light, we can infer that prospects point to companies adopting strategies to face less favorable scenarios in terms of their specific operations. These falling scores coincide with a slide in the current situation of companies. As such, since prevailing demand reported by most companies is still normal, it is clear that in terms of output, employment, production capacity, salaries and prices, business leaders surveyed are less enthusiastic. Future situation (within a year) of the companies with regard to the date of the survey (Average scores in the scale*) * Figures were computed by weighing percentages of responses better, the same or worse by 1, 0.5 and Average Average Prices Wages Production Production capacity Profitability Employment Average Business Barometer 25 Company Situation 9

10 IIIInflation Inflation and Exchange Rate The twenty-fifth Business Barometer reveals generalized confidence with regard to 2013 year-end inflation. Fully % of respondents put inflation in the % range; i.e., within the high-end of the target range set by the Banco de Mexico. Nonetheless, a significant 28% of respondents see at 2013 year-end inflation is in the % range, suggesting that some sectors are undergoing inflation pressure coloring the outlook of their business leaders. More relaxed monetary policy of recent weeks (an easing the Banco de Mexico benchmark rate) could drive an uptick in prices. As such, even though most business leaders trust prices to remain within the bounds set by the monetary authority, quite a few foresee growing pressure on prices. Expected inflation (percentage of responses) Inflation by year-end % 1% 0% 8% Less than 3.5 % 28% Between 3.5 and 4% Between 4 and 5% Between 5 and 6% Between 6 and 7% % Between 6 and 7% The outlook for year-end 2014 is similar. There is generalized confidence that inflation will come in within the Banco de Mexico target range. Fully % of those surveyed have inflation at between 3.5% and 4.0%, while 16% said it will come in below 3.5%. In contrast, 29% of respondents foresee growing pressure on prices bringing the inflation rate up to the % range. As such, we can discern a degree of agreement in the upbeat expectations that Banco de Mexico can meet inflation control targets in both 2013 and Inflation by year-end % 1% 0% 16% Less than 3.5 % 29% Between 3.5 and 4% Between 4 and 5% Between 5 and 6% Between 6 and 7% % More than 7% 10 * Due to decimals round up, the answers may not represent a 100% sum.

11 Exchange Rate Fully % of respondents foresee the year-end exchange rate will come in within the range, while 29% believe it will tick up to between 13.0 and As such, we can assert that most business leaders believe the 13.0 ceiling will not be breached. These results tell of generalized confidence in the financial system and the country s economy. Even though there is some degree of volatility in international markets, this does not necessarily mean that the Mexican peso will lose ground against other currencies. Exchange rate within a year (at the time of the survey) 6% 1% 0% 6% Less than 12. Between % Between Between Between % More than This outlook is corroborated by the outlook for the peso on the 12-month horizon. There is a clear downward bias in these expectations, with 37% foreseeing the peso breaching 13.0 while fully % of respondents, a larger percentage than recorded in our last measure, believe the ceiling will hold. Exchange rate trend over the next 12 months (percentage of responses) More than $13.00 per dolar To $13.00 per dolar Business Barometer 25 Inflation and Exchange Rate 11

12 IVThreats Threats to Economic Activity The threats to the Mexican economy sounded in this edition of Business Barometer came in as follows: 45% of respondents cite deceleration of the US economy and 39% point to insecurity as the major areas of concern. Moreover, the score for insecurity spiked by a rather hefty 10% since our last number. In this light, we can safely assert that concerns over deceleration of the US economy and the structural problem associated with insecurity should be the central focus of government efforts to alleviate these negative perceptions prevailing in the business community sampled. In contrast, the score for political discord as a threat to economic growth declined. This result appears to reflect the current administration s capacity to carry forward reforms needed to impel expansion of the Mexican economy. Similarly with regard to inflation, relatively few business leaders consider it a significant risk factor for the performance of the Mexico economy. Threats to the Mexican economy within the incoming months (percentage of responses) Average Average Political disagreements Us economic slowdown Oil prices Insecurity Inflation 12

13 Government s performance The views of business leaders surveyed regarding the government s performance continues to be low, coming in at points, its lowest score in a year. Improving education and reducing poverty are the only constituent measures to advance, suggesting that education reform and the National Hunger Crusade have in fact helped underpin perceptions of the government s performance. In contrast, the constituent scores for reducing unemployment, growing the economy, inflation control, infrastructure improvement and positioning Mexico in the world trended to the downside. These scores are in line with the deceleration seen in several productive sectors, especially export manufacturing and construction. Opinions on government performance (average scores in a scale*) * Figures were computed by weighing percentages of responses better, the same or worse by 1, 0.5 and Average Average Repositioning Mexico in the world Poverty reduction Education improvement Infraestructure improvement/ increase Security improvement Inflation control Economy growth Unemployment reduction Average Business Barometer 25 Threats to Economic Activity 13

14 V News and Business The outlook of business leaders surveyed of economic conditions in the early days of the new administration came in quite similar to scores gathered for the last administration. Fully % of respondents see little or no change, while 20% believe things have improved and only 5.0% believe things are worse. These results reveal that most business leaders surveyed trust the new administration at least to keep things on an even keel or promote improvement, which appears to be driving a general sense of confidence and certainty in the economy among business leaders across most sectors. Economic conditions during the first quarter of the new administration: 5% Worse 20% Improved Same as previous administration % In your view, the new administration has centered its efforts on: 80 % Creating political consensus Improving the country s image Improving the economic climate % 26% 21% 15% 15% Combating corruption Reducing poverty 10 0 Improving public security 14

15 Most business leaders surveyed believe the current administration has centered its efforts on creating political consensus, a result in line with the Pact for Mexico accords. Improving the country s image came in second, followed by the economic climate and combating corruption. Reducing poverty and improving security were the variables rated lowest by business leaders surveyed, which for the former appears to be somewhat paradoxical in view of the government s National Hunger Crusade effort implemented to combat nutritional deficiencies among the poor. As for improving security, the score stands in line with previous results, which reflected a growing concern in this matter, and in which the variable Health and education, combating addictions and promoting employment are the best ways to guarantee well-being and human development and controlling. What should promote the new administration in the coming months? % 27% 21% % Tax Reform Energy Reform Preventing economic slow down Combating corruption 1 Miguel Ángel Osorio Chong, Opening address of the Inter- Secretarial Commission for the Prevention of Violence and Criminality (Aguascalientes, February 12, 2013) Business Barometer 25 News and Business 15

16 Opinions of those surveyed were divided with regard to the strategies the government should pursue in coming months. The largest segment, 34%, emphasized tax reform, while 27% pointed to energy reform. As such, well over half of the sample believes structural reforms should be fundamental thrusts in the strategy deployed by the Peña Nieto administration. Nonetheless, fully 21% of respondents opine that preventing deceleration of the economy should be stressed. Finally, the balance of % believes the priority should be combating corruption in order to control the onerous costs it levies across the entire range of business activities. With implementation of the Labor Reform, have they improved economic conditions in your company? 5% Don t know Yes No 9% 85% According to fully 85% of respondents in this edition of Business Barometer, economic conditions of their companies have not improved with the advent of labor reform, while only 9.0% think things have improved. Nonetheless, only a scant 5.0% said they did not know if labor reform has brought any improvement in this regard. In the area hiring, 88% of respondents reported little or no effect of the labor reform, while only 9.0% said that it has exerted some effect on hiring. All told, these results allow us to assert that labor reform has exerted only a modest impact in the short term and so far has fallen significantly short of expectations stirring during the lead up to passage. With the new labor Reforms, has your company expanded hiring? 5% 2% Don t know Yes No 9% 88% 16

17 VI Conclusions Business leaders surveyed have held to a generally favorable outlook of the current business climate and in fact have an even more upbeat opinion for next year. Nonetheless, the evaluation of the situation of companies is clearly trending to the downside, even as most respondents reported normal demand levels. Moreover, in terms of output, employment, production capacity, salaries and prices, the sample expressed less confidence. In regard to inflation and the exchange rate, most opinions converged around the idea of stability without undue jitters. In this context, nonetheless, a significant portion of the sample expressed concern over deceleration of the US economy and public insecurity as threats to the performance of the Mexican economy. Additionally, the score for government performance also slipped since our last report touching a 12-month low. For the period under study in this edition of Business Barometer, most business leaders sampled expect economic conditions shall be very similar to those prevailing during the past administration. Moreover, in their view the current administration is focusing in greater or lesser degree on building political consensus and achieving structural reforms as the linchpins of its overall strategy to prevent economic slowdown and combat corruption. Meanwhile, Labor Reform has not exerted an immediate impact on the economic condition of companies or hiring. In general terms, the future situation of companies and the business climate are viewed with optimism; nonetheless, there are some indicators within companies, whose administration and strategies shall be key to sustaining the positive outlook of future business prospects. Future situation and business environment (within a year at the time of surveys) (0: pesimist; 100: optimist) Average Average Business enviroment Company Companies general * Business environment: Five indicators (Investment climate, credit availability, employment, security and economic situation). ** Company: Six indicators (Production capacity, employment, prices, production, profitability and wages). *** Companies general situation. Business Barometer 25 Conclusions 17

18 VII Survey Framework Deloitte s Business Barometer No. 25 surveyed 3 executives from Mexico s leading companies from 4 to March 22nd, According to the most recent available information, these companies boast aggregate sales above $6,076,006. million MXP. Participation rate by industry Consumer Products 28% Financial Services 25 23% Manufacturing Energy and Natural Resources % 14% Technology, Media and Telecommunications Real State % 4% 4% 3% 3% Transport and Aviation Services Services Life Sciences and Healthcare Income level 5% Not available 13% 31% More than 10,000 8% Between 5,001 and 10,000 Between 2,001 and 5,000 8% Between 1,001 and 2,000 11% 11% Between 1 and 1,000 13% Between 1 and 0 Less than 0

19 We thank all those who participated in the research for Business Barometer No. 25, especially Dr. Jose Luis de la Cruz Gallegos, Director of the Business and Economic Research Center of ITESM-CEM, for his invaluable analysis and assistance in drafting this report.

20 For further information, please contact us at: Phone. + () 80 63, in Mexico City and the metropolitan area Deloitte ( ) Toll free for the rest of the country. Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee, and its network of member firms, each of which is a legally separate and independent entity. Please see for a detailed description of the legal structure of Deloitte Touche Tohmatsu Limited and its member firms. Deloitte provides audit, tax, consulting, and financial advisory services to public and private clients spanning multiple industries. With a globally connected network of member firms in more than 1 countries, Deloitte brings world-class capabilities and high-quality service to clients, delivering the insights they need to address their most complex business challenges. Deloitte has in the region of 200,000 professionals, all committed to becoming the standard of excellence. As used in this document, "Deloitte" means Galaz, Yamazaki, Ruiz Urquiza, S.C., which has the exclusive legal right to engage in, and limit its business to, providing auditing, tax consultancy, financial advisory, and other professional services in Mexico, under the name "Deloitte". This publication contains general information only, and none of Deloitte Touche Tohmatsu Limited, its member firms, or their related entities (collectively the Deloitte Network ) is, by means of this publication, rendering professional advice or services. Before making any decision or taking any action that may affect your finances or your business, you should consult a qualified professional adviser. No entity in the Deloitte Network shall be responsible for any loss whatsoever sustained by any person or entity who relies on this publication Galaz, Yamazaki, Ruiz Urquiza, S.C.