Outlook for the Mexican economy
Alejandro Díaz de León-Carrillo, Governor, Banco de México*
GIC Central Banking Conference in Partnership with Banco de México February 27, 2020
*/ The opinions and views expressed herein are the sole responsibility of the author and do not necessarily represent the institutional stance of Banco de México or of its Governing Board.
Outline 1
External conditions
2
Current situation of the Mexican economy
3
Inflation
4
Monetary policy
5
Forecasts and final remarks Outlook for the Mexican economy
1
During 2019, the world economy continued to decelerate. This reflected the impact of: 1) prolonged trade tensions; 2) high geopolitical risks, and 3) certain idiosyncratic factors in several economies. Although some of these risks subsided, others have emerged such as the coronavirus outbreak (Covid-19). World Economy GDP Growth Quarterly annualized % change, s. a. Q4-2019
12
Global Activity Indicators Annual % change of 3-month moving average and deviation from threshold of 50 December January
World trade
Emerging
China: Evolution of GDP Growth Forecasts for Q1-2020 Annual % change
6
February
6.0
5
World
8
Bank of America
4 4
6.5
Capital Economics
3
5.5 5.0
JP Morgan
4.5 0
Advanced
Barclays
2
Industrial production
4.0 1
UBS
-4
3.5
0
2.0
21-Feb-20
14-Feb-20
7-Feb-20
31-Jan-20
24-Jan-20
17-Jan-20
Source: CPB Netherlands and Markit.
2020
2019
2018
2017
2016
2015
2019
2017
2015
2013
2011
2009
2007
2005
2.5
-2
-12 s. a. / Seasonally adjusted figures. Note: Estimations were used for Q4-2019 calculations. The sample of countries used for the calculations represents 85.6% of world GDP measured by purchasing power parity . Source: Prepared by Banco de MĂŠxico with data from Haver Analytics, J.P. Morgan and International Monetary Fund (IMF).
Goldman Sachs
-1
10-Jan-20
-8
3.0
PMI: new orders
Source: Bloomberg and JP Morgan.
Outlook for the Mexican economy
2
International prices of commodities have registered high volatility. Although the prices of oil increased by the end of 2019, such trend has reverted due to the coronavirus outbreak in China. Selected Industrial Metals Prices 1/ Index 01-Jan-2018=100
International Crude Oil Prices US dollars per barrel
180
90 85
Iron 160
80
Aluminum
75
140
Brent
70
120
Nickel
65
Total
60
100
55
Mexican crude oil mix
WTI
50
80
Copper
45 40
Mar-20
Nov-19
Sep-19
Jul-19
May-19
Mar-19
Jan-19
Nov-18
Sep-18
Jul-18
May-18
Mar-18
Jan-18
1/ The GSCI index is an indicator of 24 commodities prepared by Goldman Sachs. In particular the industrial metals component follows the prices of aluminum, copper, nickel, zinc and lead. Source: Bloomberg.
Jan-20
February
60
Jan-20
Nov-19
Sep-19
Jul-19
May-19
Mar-19
Jan-19
Nov-18
Sep-18
Jul-18
May-18
Mar-18
Jan-18
February
Source: Bloomberg.
Outlook for the Mexican economy
3
Headline inflation in advanced economies remains below the respective central banks’ targets, while core inflation continues at low levels, reflecting the absence of inflationary pressures. Meanwhile, inflation expectations remain at low levels. G3: Inflation 1/ Annual % change
Headline December
Core
3
3
December
2 2
1
1 0
0
1/ G3 includes the United States, Japan and the euro area. For the U.S. the Personal Consumption Expenditure (PCE) is used. Source: Prepared by Banco de México with data from BEA, Eurostat and Japan’s Statistics Bureau.
2019
2018
2017
2016
2015
2014
2013
2019
2018
2017
2016
2015
2014
2013
-1
1/ G3 includes the United States, Japan and the euro area. For the U. S. the figure is calculated based on the Personal Consumption Expenditure Price Index that excludes food and energy (PCE). For Japan the price index excludes energy and fresh food and the direct effect of the consumption tax increase. Source: Prepared by banco de México with data from BEA, Eurostat and Japan’s Statistics Bureau. BEA, Eurostat and Japan’s Statistics Bureau.
Outlook for the Mexican economy
4
In this context of low inflation and risks for the world economy, in the short and, especially, in the medium terms, the central banks of the main advanced economies maintained or expanded their accommodative monetary policy stances.
G3: Government Bonds Interest Rates 1/ %
2-year
1/ G3 includes the United States, Japan and the euro area. Source: Bloomberg.
5
5
February
2020
2019
-1
2018
-1
2017
0
2016
0
2015
1
2014
1
2013
2
2012
2
2011
3
2010
3
2009
4
2008
4
2007
2020
2019
2018
2017
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
February
10-year
1/ G3 includes the United States, Japan and the euro area. Source: Bloomberg.
Outlook for the Mexican economy
5
International financial markets exhibited higher risk appetite, supported by the accommodative monetary policy stances, the announcement of the preliminary trade agreement between the U.S. and China, and the signing of the withdrawal agreement between the U.K. and the European Union. However, they have recently been affected by the risk associated with the coronavirus. United States: Financial Conditions Index 1/ Units
Global Risk Appetite Index Index February
7 Loosening
6
Euphoria
February
Stock Markets of Emerging and Advanced Economies Index 01-Jan-2018=100
101
February
Advanced 2/
115
5
110
4
Risk appetite
105
100
3 2
100
1
95
0
90 99
-1
85
-2
Panic
-3
80
Emerging 3/
75
-4 98
Note: The risk appetite index compares several financial assets, taking into account that in periods of high appetite for higher risk assets, such as equities of advanced and emerging economies, these tend to register high returns, while safe assets, such as government bonds of the United States, the euro area and Japan, tend to present negative returns. On the other hand, during periods of low appetite for risk, the opposite occurs. In this context, the index value refers to the coefficient of a regression of the daily yield of 64 assets based on their volatility. Source: Credit Suisse.
1/ The financial conditions index is constructed based on the effect of five variables on economic activity: the reference interest rate, the 10-year government bond, the spread of the bonds with investment grade on the government debt bond with equivalent maturity, the ratio of the stock index with average earnings of 10-year equities and the trade weighted exchange rate. Source: Banco de MĂŠxico with Bloomberg and Goldman Sachs data.
Outlook for the Mexican economy
Jan-20
Jul-19
Jan-19
Jul-18
Jan-18
Jul-17
70
Jan-17
Jan-20
Jul-19
Jan-19
Jul-18
Jan-18
Jul-17
Jan-17
Jan-20
Jul-19
Jan-19
Jul-18
Jan-18
Jul-17
-5
Jan-17
120
Note: The MSCI indices of both advanced (MSCI World Index) and emerging (MSCI Emerging Market Index) economies are presented. 3/ Includes Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, Holland, New Zealand, Norway, Portugal, Singapore, Sweden, Switzerland, the United Kingdom and the United States. 4/ Includes Mexico, Brazil, Chile, China, Colombia, Peru, the Czech Republic, Egypt, Greece, Hungary, India, Indonesia, South Korea, Malaysia, the Philippines, Poland, Qatar, Russia, South Africa, Taiwan, Thailand, Turkey and the United Arab Emirates. Source: Bloomberg.
6
The relaxation in global financial conditions led to greater flows of financial assets to emerging economies, both in fixed income markets and in equity markets. However, emerging economies´ asset prices have been affected by the recent episodes of volatility. Asset Performance in 2019 and 2020 %, basis points 2019 Region
Latin America
Europe
Asia
Africa
Country
Currencies
Stock indices
Mexico Brazil Chile Colombia Russia Turkey Hungary China Malaysia India Thailand Indonesia South Africa
3.82% -3.87% -7.74% -0.84% 12.46% -11.12% -5.17% -1.22% 1.04% -2.25% 8.61% 3.78% 2.48%
4.56% 31.58% -8.53% 25.38% 29.14% 25.37% 17.74% 22.30% -6.02% 14.38% 1.02% 1.70% 8.24%
10Y Interest rates -204 -255 -114 -58 -224 -394 -68 -17 -75 -67 -84 -90 -51
2020 CDS
Currencies
Equity markets
Interest rates 10Y
CDS
-76 -108 -20 -85 -98 -79 -17 -36 -75 -47 -6 -10 -60
-1.87% -10.40% -7.78% -5.24% -5.62% -3.48% -5.75% -0.86% -3.29% -0.40% -6.33% -0.53% -9.38%
-1.85% -8.58% -7.97% -4.37% -0.93% 0.65% -5.56% -2.04% -5.89% -3.31% -13.51% -9.69% -3.57%
-38 8 18 -60 -47 24 29 -49 -34 -55 -52 -32 -43
3 10 8 9 9 17 -26 9 10 -4 6 0 15
Note: Interest rates correspond to interest rate swaps for 10-year maturity. In the case of Mexico, sovereign rates in local currency for 2Y and 10Y are shown. Source: Bloomberg.
Outlook for the Mexican economy
7
In the last years, emerging economies have been subject to terms of trade shocks, trade tensions and idiosyncratic risk factors, which have had different effects on their inflation rates. Nominal Exchange Rate against USD Index Jan-01-2014=100
Accumulated Headline Inflation Since 2014 %
200
45
Depreciation 40
Brazil
Colombia
180 35
Mexico Brazil
160
30
25 140
South Africa
Mexico
20
Colombia
Chile
120
Chile
15 10
South Africa
100 5
Source: Bloomberg.
2019
2018
2017
2016
2015
2020
January
80
2014
2020
2019
2018
2017
2016
2015
2014
February
Source: Haver Analytics.
Outlook for the Mexican economy
8
0
Among emerging economies, the Mexican peso stands out as one of the most traded currencies worldwide. MXN Foreign Exchange Market Turnover by Instrument Billions of US dollars
OTC Foreign Exchange Turnover by Instrument and currency Billions of US dollars
100
160 135
140
6
114 8
100 114
21
20
14 12
2
60
13
97 40
24 57 5
8 2 11
5 15
18
2004
2007
2010
43
48
2016
2019
20
48
0 2013
13
63
30
100 72
72
71
27 10
31
37
7 27
5 24
34
71 2
60 10
43
35
14
41
13
22 5 12
27 12 3 9
Hungary
20
4
45
Poland
44 40
50
15
Taiwan
50
30
80
36
113
Brazil
45
36
Turkey
6
South Africa
60
200
120
Russia
59
97
138
India
70
Foreign exchange swaps Outright forwards Spot market External Total counterparties 2/
Total FX options Swaps Outright forwards Spot transactions
Mexico
80
Options and other FX products /1
300
284
China
90
180
0
1/ The category “other FX products” covers highly leveraged transactions and / or trades whose notional amount is variable and where a decomposition into individual plain vanilla components was impractical or impossible. 2/ The solid line is defined as the share of transactions between external counterparties as percentage of the total market. Source: 2019 Triennial Central Bank Survey of Foreign Exchange and OTC Derivatives Markets. Bank for International Settlements and Banco de México.
Outlook for the Mexican economy
9
Outline 1
External conditions
2
Current situation of the Mexican economy
3
Inflation
4
Monetary policy
5
Forecasts and final remarks Outlook for the Mexican economy
10
For several quarters, economic activity has been exhibiting a moderate downward trajectory.
1.18 1.33
1.10 1.13
1.21
2.0
120
1.5
115
1.0
110
Global Index of Economic Activity Index 2013=100, s. a.
140
130
Services (62.7%)
120
Total 0.5
105
0.0
100
110
95
90
Industrial (34.2%)
s. a. / Seasonally adjusted figures. Source: Mexico’s National Accounts System (SCNM, for its acronym in Spanish), INEGI.
2018
2017
2016
2015
80
2019
December
90
2014
-1.0
2012
2019
2018
2017
2016
2015
2014
Q4-2019
2013
-0.69
2013
2012
-0.5
100
Agricultural and livestock products (3.2%)
-0.13 -0.10 -0.08 -0.14
-0.31
-0.25
-0.02
0.06
0.31
0.48 0.33
0.60 0.44
1.04
1.11 0.38
0.55
0.97 0.55 0.65
0.84 0.35
0.63
0.56
0.89
1.27
Gross Domestic Product Quarterly % change, s. a.
s. a. / Seasonally adjusted figures. Note: Figures in parentheses represent their share in 2013. Source: Mexico’s National Accounts System (SCNM, for its acronym in Spanish), INEGI.
Outlook for the Mexican economy
11
Industrial activity contracted, while services exhibited low growth and continue showing some weakness. IGAE Services 1/ Index 2013=100, a. e.
Industrial Activity Index 2013=100, s. a.
140
130
Manufacturing (49.7%)
Transportation and information (14.0%)
120
Utilities (4.7%) 110
Total Construction (23.3%)
140
Accommodation and food services (3.6%) Professional, management of companies and enterprises (8.9%)
130
Finance and real estate (23.8%)
120
100
Trade 2/ (28.8%)
90
Mining(22.3%)
130
120
Arts, entertainment, and recreation (3.8%)
110
110
100
100
80
s. a. / Seasonally adjusted figures. Note: Figures in parentheses represent their participation in 2013. Source: Monthly Indicator of Industrial Activity, Mexico’s National Accounts System (SCNM, for its acronym in Spanish), INEGI.
2018
2017
2016
2015
2014
2013
2019
December
90
2012
December
2018
2017
2016
2015
2014
2013
60
2012
2019
2018
2017
2016
2015
2014
2013
2012
December
Public administration (7.1%)
Educational and health care (9.9%)
2019
70
s. a. / Seasonally adjusted figures. Note: Figures in parentheses represent their participation in 2013. 1/ Global Indicator of Economic Activity (IGAE, for its acronym in Spanish). 2/ Includes both wholesale and retail trade. Source: Mexico’s National Accounts System (SCNM, for its acronym in Spanish), INEGI.
Outlook for the Mexican economy
12
90
A lower dynamism of consumption has been observed recently. However, its main determinants kept showing relative strength. Private Consumption Index 2013=100, s. a. 130
Remittances Billion USD and constant pesos, s. a.
3.5
65
12
Consumer Confidence and Total Real Wage Bill Response balance and annual % change, s. a.
50
Consumer confidence
125
Imported goods (10%)
120
Domestic services (45%)
3.0
8
45
4
40
0
35
-4
30
55
115
US dollars
110
Total
2.5
45
105 100 35
90
s. a. / Seasonally adjusted figures. Note: Figures in parentheses represent their share in 2013. Source: Mexico’s National Accounts System (SCNM, for its acronym in Spanish), INEGI.
s. a. / Seasonally adjusted figures. 1/ Prices as of the second fortnight of July 2018. Source: Banco de México and INEGI.
Outlook for the Mexican economy
25
2019
2018
2017
2016
-8
2013
25
Q4-2019 January
2012
2019
2018
2017
2016
2015
2014
1.5
2013
85
December
2012
2019
2018
2017
2016
2015
2014
2013
2012
November
Real wage bill 2015
95
Mexican peso 1/
2.0
2014
Domestic goods (45%)
s. a. / Seasonally adjusted figures. Source: Prepared by Banco de México with data from the National Survey of Occupations and Employment (ENOE, for its acronym in Spanish) and the National Survey of Consumer Confidence (ENCO, for its acronym in Spanish), INEGI and Banco de México.
13
Gross fixed investment continued to contract, as a result of the weakness in spending on machinery and equipment and investment in construction. Investment Index 2013=100, s. a. 134
Machinery and equipment (38.6%)
Investment in Residential and Non-residential Construction Index 2013=100, s. a.
Real Value of Construction Output by Contracting Institutional Sector 1/ Index 2013=100, a. e.
130
Private residential housing (18.7%)
110
120
126
Residential (42%)
100 110
118
Total
90 100
Private (57.2%)
Total
s. a. / Seasonally adjusted figures. Note: Figures in parentheses represent their share in 2013. Source: Mexico’s National Accounts System (SCNM, for its acronym in Spanish), INEGI.
Outlook for the Mexican economy
60 December
2016
2015
70
2014
2019
2018
2017
2016
2015
2014
2013
2019
2018
2017
2016
2015
2014
s. a. / Seasonally adjusted figures. Note: Figures in parentheses represent their share in total in 2013. Source: Mexico’s National Accounts System (SCNM, for its acronym in Spanish), INEGI.
November
86
70
Public (42.8%)
80
2013
94
Private excl. residential housing (38.5%)
2019
Non-residential (58%)
November
2013
90
80
2018
102
Total
2017
110
Construction (61.4%)
120
s. a. / Seasonally adjusted figures. Note: Figures in parentheses represent their share in 2018. 1/ Seasonally adjusted by Banco de México, except for the total series. Source: Prepared by Banco de México with data from ENEC, INEGI.
14
50
Among the factors that business representatives and analysts consider that could limit growth those related to governance stand out. Progress in addressing certain problems that have affected the economy for years, such as the rule of law (corruption, insecurity and impunity), would foster an environment that would allow for incentivizing growth. Percentage Distribution of Responses from Analysts and Business Representatives when Consulted on the Three Main Factors that Could Hinder Economic Activity Growth in the Next Six Months 1/ Governance 2/ Domestic economic conditions 3/
Monetary policy Other
Inflation Public finances
Analysts
External conditions
Business representatives and analysts
100
100 90
90
80
80
70
70
60
60
50 40
50
30 40
Analysts Business representatives
Analysts Business representatives
Analysts Business representatives
Analysts Business representatives
Analysts Business representatives
2020
2019
2018
2017
2016
2015
2014
0
Analysts Business representatives
0
Analysts Business representatives
20
Analysts Business representatives
10 Analysts Business representatives
30
10
2013
20
Jan.16
Jul.16
Feb.17
Jan.19
Jul.19
Sep.19
Oct.19
Nov. 19
Dec.19
1/ Responses from the Survey of Private Sector Forecasters associated with the question: Which three main factors will limit economic growth in the next six months? Responses from the Monthly Survey of Regional Economic Activity (EMAER, for its acronym in Spanish) associated with the question: In your opinion, which three main factors will limit economic activity growth in your state in the next six months? Source: Monthly Survey of Regional Economic Activity (EMAER, for its acronym in Spanish) and Survey of Private Sector Forecasters. 2/ Refers to factors such as: public insecurity problems, domestic political uncertainty, corruption, impunity and lack of rule of law. 3/ Refers to factors such as: uncertainty over the domestic economic situation, domestic market weakness, households’ level of indebtedness, firms’ level of indebtedness, absence of structural change in Mexico, availability of domestic financing in Mexico, oil production platform and lack of market competition. Source: Monthly Survey of Regional Economic Activity (EMAER, for its acronym in Spanish) and Survey of Private Sector Forecasters.
Outlook for the Mexican economy
15
Impact of Uncertainty on Consumption and Investment in Mexico. For several years, the Mexican economy has faced an environment of high uncertainty, due to both external and domestic factors. Macroeconomic Uncertainty Index for Mexico (IIM) 1/ January 2015 Mexican oil mix prices fall by 56% (Jul 14 – Jan 15)
December January 2017 2015 Announcement Presidential of a possible campaign in renegotiation of NAFTA the U.S.
July 2018 Presidential elections in Mexico
October 2018 NAICM 2/ cancelation
Maximum Uncertainty Index Associated with 1-month IIM 3/
0.75
October
7.0
6.0
5.0
4.0 0.70 3.0
2.0
1.0
1/ One-month forecast horizon: 2015-2019; see “Quarterly Report October – December 2019”, Banco de México, p. 22. 2/ Mexico City's New International Airport (NAICM, for its Spanish acronym). Source: Banco de México.
0.0
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
0.65
2019
2018
2017
2016
2015
2014
October
3/ Refers to the IIM percentage increase over the maximum level reached in the previous 6 months. Source: Banco de México. See “Quarterly Report October – December 2019”, Banco de México, p. 22.
Outlook for the Mexican economy
16
Impact of Uncertainty on Consumption and Investment in Mexico. The higher uncertainty has negatively affected consumption and, especially, investment. Impulse Response Functions to an Uncertainty Shock 1/ Investment
Consumption
0.4%
0.4%
0.0%
0.0%
-0.4%
-0.4%
-0.8%
-0.8%
-1.2% 0
6
12
18
24
30
36
42
48
54
60
-1.2% 0
6
Months
12
18
24
30
36
42
48
54
60
Months
1/ See “Quarterly Report October – December 2019”, Banco de México, p. 22. Note: Response to a standard deviation shock. Grey shadows represent 90% statistical confidence intervals. Source: Banco de México.
Outlook for the Mexican economy
17
Impact of Uncertainty on Consumption and Investment in Mexico. The results suggest that the negative effect of higher uncertainty on consumption and investment has prevailed above that of other factors, such as financing costs. Counterfactual Exercises 1/ 3-month moving average, January 2016=100 Investment
Consumption
120
Counterfactual A + CETES (B): without the effect of the interest rate Counterfactual B + IGAE (C): without the IGAE effect Counterfactual C + Public Investment (D): with constant level of public investment
Counterfactual A + CETES (B): without the effect of the interest rate Counterfactual B + IGAE (C): without the IGAE effect
115
110
105
105
Counterfactual uncertainty (A): excluding increase in uncertainty
95
Observed investment
95
Observed consumption
90
Oct-19
Apr-19
Jan-19
Oct-18
Jul-18
Apr-18
Jan-18
Oct-17
Jul-17
Apr-17
Jan-17
Oct-16
Jul-16
Apr-16
Jul-19
October
85
Jan-16
Oct-19
Jul-19
Apr-19
Jan-19
Oct-18
Jul-18
Apr-18
Jan-18
Oct-17
Jul-17
Apr-17
Jan-17
Oct-16
Jul-16
Apr-16
100
90
October
Jan-16
115
110
100
Counterfactual uncertainty (A): excluding increase in uncertainty
120
1/ See “Quarterly Report October – December 2019”, Banco de México, p. 22. Note: Counterfactual trajectories are constructed based on the historical decomposition of each VAR, by matching the contributions of the uncertainty and CETES to zero accordingly. Source: Banco de México.
Outlook for the Mexican economy
18
85
Manufacturing exports have lost momentum. This was mainly the result of the contraction in automotive exports, although non-automotive exports also exhibited weakness. Manufacturing Exports Index 2013=100, s. a. Automotive and Non-automotive
By Destination
180
150
170 140 160 130
150
Total
United States (82.3%)
140
Total 120
Automotive (35.8%) 130
110
120
Rest of the world (17.7%)
110
100
100
Non-automotive (64.2%)
90 90 December
80
2019
2018
2017
2016
2015
2014
2013
80
2012
2019
2018
2017
2016
2015
2014
2013
2012
December
s. a./ Seasonally adjusted series. Note: Figures in parentheses represent their participation in 2018. Source: Prepared by Banco de México with data from Mexico’s Tax Administration Service (SAT, for its acronym in Spanish), the Ministry of the Economy (SE, for its acronym in Spanish), Banco de México, the National Institute of Statistics and Geography (INEGI, for its acronym in Spanish). Mexico’s Merchandise Trade Balance, and National System of Statistical and Geographical Information (SNIEG, for its acronym in Spanish). Information of national interest.
Outlook for the Mexican economy
19
External accounts have reverted their medium-term trend. Specifically, a surplus in the non-oil trade balance and a deficit in the oil trade balance is observed, along with a sizeable reduction of the current account deficit. Trade Balance USD million
Current Account % of GDP
12,000
Non-oil
2
10,000 1
Current account
8,000 6,000
0 -0.2
4,000
-0.4
-0.7 -0.8
2,000
-0.9
-0.5 -0.9
-1.0 -1.6
-1.5
0
-1
-0.9 -1.8
-1.7
-1.9
-2,000 -4,000
-4
-8,000
Source: SAT, SE, Banco de México, INEGI. Mexico’s Merchandise Trade Balance. SNIEG. Information of national interest.
-5
2019
2018
2017
2016
2015
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
Q4-2019
2000
-10,000
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Q4-2019
-3
Annual data
-6,000
Oil
-2.6
-2.5
-2.6
-2
-2.3
-1.9
-2.3
2014
Total
Source: Banco de México and INEGI.
Outlook for the Mexican economy
20
Although the national unemployment rate has reached its lowest level in the last three quarters, the urban unemployment rate has been slightly higher than registered previously. In addition, the underemployment rate continued to increase and the creation of IMSS-insured jobs continues to decelerate. Meanwhile, wages continued to advance in real terms.
December
Jobs Insured by IMSS: Permanent and Temporary in Urban Areas Annual change in thousands
8.0
January
7.5
800
7.0
Urban
4 600 500
2
5.0
400
0
300 -2
Source: IMSS.
-4
2019
2018
2017
2015
2014
2013
2012
-6
2011
2019
2018
2017
2016
2015
2014
2013
2012
2011
0
2010
2.5
2019
2018
2017
2016
2015
2014
3.0
100
s. a. / Seasonally adjusted data. 1/ The nationwide NAIRU is the level of the unemployment rate that does not accelerate inflation. Source: Prepared by Banco de MĂŠxico with IMSS and INEGI data.
Real
200
3.5
2016
1/
2010
NAIRU
2013
2012
2011
2010
2009
Nominal
5.5
4.0
National
8 6
6.5
4.5
2008
Q4-2019
700
6.0
2007
900
Average Wage of Salaried Workers according to the National Employment Survey (ENOE) 2/ Annual % change Millares
National and Urban Unemployment Rates %, s. a.
2/To calculate average nominal wages, the bottom 1 percent and the top 1 percent in the wage distribution were excluded. Individuals with zero reported income or those who did not report it are excluded. Source: Calculated by Banco de MĂŠxico with data from INEGI (ENOE), IMSS, and STPS.
Outlook for the Mexican economy
21
Slack conditions continued to widen, reflecting the moderate decline of economic activity. Slack Indicators: Main Component by Indicators Frequency 3/ % Quarterly
8
21
6
3
4
2
-6
95% confidence interval 2/
s. a. / Seasonally adjusted data. 1/ Output gap estimated with a tail-corrected Hodrick-Prescott filter; see “Inflation Report April – June 2009”, Banco de México, p. 74. 2/ Output gap confidence interval calculated with a method of unobserved components. Source: Prepared by Banco de México with data from INEGI and Banco de México.
2019
2017
2016
2015
2014
2012
2011
2010
2009
2018
Q3-2019
-12
-2 -3
Demand conditions in the lending market
-4
-10
2019
2017
2016
2015
2014
2013
2012
2011
2010
2009
2008
3
2018
Q4-2019 December
2008
5
2007
-3
-8
2007
7
Consumption Monthly indicator
-2
-4 November
-5
-5
2019
9
Economic activity indicator
-1
2018
GDP
-1
2017
-4
2016
11
0
2015
-2
0
2014
13
1
2011
0
1
2010
15
Quarterly indicator
2009
2
2
Labor market
2008
17
4 3
2007
IGAE
2013
19
Monthly
4
23
2013
Output Gap Estimate % of potential output, s. a.
2012
1/
3/ Main Indicators constructed using CCM methodology; see Banco de México (2018), “Quarterly Report, October-December 2017”, p.47. Monthly and quarterly slack indicators are constructed with the main component of sets of series which includes 11 and 12 indicators, respectively. Slack indicators of consumption, economic activity, aggregate demand, labor market and demand conditions in the lending market are based on the first main component of sets of series which includes 6, 4, 3 and 6 indicators, respectively. Source: Prepared by Banco de México with data from INEGI and Banco de México.
Outlook for the Mexican economy
22
Outline 1
External conditions
2
Current situation of the Mexican economy
3
Inflation
4
Monetary policy
5
Forecasts and final remarks Outlook for the Mexican economy
23
During 2019, annual headline inflation decreased significantly, particularly during the 2H-2019, reaching levels consistent with the 3% target at the end of Q3 and during Q4 2019. This was mainly due to the decrease in noncore inflation, given that the core index, which better reflects medium-term pressures on prices, showed persistence at levels above the target, although with slight reductions. Consumer Price Index Annual % change 1/ F1 February
Incidences in percentage points 2/
14
F1 February
8
13 7
12
Headline
11
6
10
Non-core
Merchandise
9
5
8
Headline
Services
7
4
Non-core
6
3.52 3 1.51
5
Variability interval
4 3.69 3 3.52 3.03 2
Core
2 1.25 1
1
0.76 0
1/ Since 2003, a permanent inflation target of 3%, with a variability interval of +/-1%, was established for headline inflation. Source: Banco de México and INEGI.
Outlook for the Mexican economy
2020
2019
2018
2017
2016
2015
2020
2019
2018
2017
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
0
2/ The sum of inflation’s components may not add up due to rounding. Source: Prepared by Banco de México with data from INEGI.
24
The annual average non-core inflation level during Q4 2019 was the lowest on record for a quarter, and was affected by a lower annual change of agricultural and livestock prices, and of energy prices. However, since the beginning of 2020, this component increased due to a higher annual change in fruit and vegetable prices and due to the comparison base in gasoline prices. Non-core Price Subindex Annual % change Agricultural and Livestock Products
Energy Products and Government-authorized Prices
27
27
24
24
21 18
Total
21
Total
Energy products
15
18 15
Livestock 12 products
9
6
6
3
3
0
0
Governmentauthorized prices
-3
-6
-6
-9
-9
2019
2018
2017
-12
2020
F1 February
-12
2016
2020
2019
2018
2017
F1 February
2016
9
-3
Fruits and vegetables
Source: Banco de MĂŠxico and INEGI.
12
Source: Banco de MĂŠxico and INEGI.
Outlook for the Mexican economy
25
Average annual core inflation decreased slightly, although it rebounded at the beginning of 2020. Core Price Subindex Annual % change Merchandise
Services 10
7
9
6
Education
8
Foods, beverages and tobacco
5
7
4
Merchandise Services
6
3
5 2 4
Housing
1
3
Non-food merchandise
0
2
Other Services -1
1
Source: Banco de MĂŠxico and INEGI.
2018
2017
2016
2015
2014
2013
2012
2011
2010
2019
F1 February
0
2009
2020
2019
2018
2017
2016
2015
2014
2013
F1 February
Source: Banco de MĂŠxico and INEGI.
Outlook for the Mexican economy
26
-2
Inflation Indicators More Related to Supply Side Factors. Evidence suggests that certain supply shocks that have affected the economy could be offsetting the effects of slackness on core inflation. Indicators More Related to Supply Shocks and Observed Core Inflation Annual % change 6.5
5.5
More related to exchange rate 4.5
More related to energy products 3.5
More related to wages
Supercore inflation
2.5
Core inflation 2020
2019
2018
2017
2016
2015
2014
2013
2012
2011
F1 February
Source: Prepared by Banco de México with data from INEGI; see “Quarterly Report October – December 2019”, Banco de México, p. 53.
Outlook for the Mexican economy
27
1.5
Outline 1
External conditions
2
Current situation of the Mexican economy
3
Inflation
4
Monetary policy
5
Forecasts and final remarks Outlook for the Mexican economy
28
Monetary policy conduction Overnight Interbank Interest Rate and Government Bond Yields %
Meetings of August, September, November and December 2019 and February 2020
10.0
25 bp reductions in each meeting to a level of 7%
9.5
30 years
9.0
1 day
The main reasons highlighted in the press releases: The levels attained by headline inflation and its outlook in the horizon in which monetary policy operates. Wider slack conditions in the economy. The recent performance of external and domestic yield curves.
8.5 8.0 7.5
3 years 7.0
10 years
6.5 6.0 5.5
Source: Proveedor Integral de Precios (PiP).
Outlook for the Mexican economy
29
5.0
Mar-20
Jan-20
Nov-19
Sep-19
Jul-19
May-19
Mar-19
Jan-19
Nov-18
Sep-18
Jul-18
May-18
Mar-18
Jan-18
Nov-17
Sep-17
Jul-17
May-17
Mar-17
Jan-17
February
Short-, medium-, and long-term inflation expectations remained relatively stable for headline inflation, while they showed increases for core inflation. Inflation Expectations Median, % For the End of 2020
Break-even Inflation and Inflation Risk Implied in Bonds %
Medium- and Long-term 5.0
Headline
5.0
5.0
Headline
Break-even inflation implied in 10-year bonds
Core
Core 4.5
Variability interval (upper limit)
4.0
4.5
4.5
4.0
4.0
3.5
3.5
3.0
3.0
2.5
2.5
Next 4 years 3.5
3.0
Inflation target
Next 5-8 years 2.5
20-day moving average
Source: Banco de México’s Survey of Private Sector Forecasters.
Source: Banco de México’s Survey of Private Sector Forecasters.
Outlook for the Mexican economy
2.0
2020
2018
2017
2016
2015
2014
2013
2012
2019
February
2.0
2011
2020
2018
2017
2016
2015
2014
2013
2012
2019
January
2.0
2011
Jan-20
Nov-19
Sep-19
Jul-19
May-19
Mar-19
Jan-19
Nov-18
Sep-18
Jul-18
May-18
Mar-18
Jan-18
January
Note: the break-even inflation and inflation risk is calculated as the difference between nominal and real long-term interest rates. Source: Banco de México estimates with Valmer and PiP data.
30
Outline 1
External conditions
2
Current situation of the Mexican economy
3
Inflation
4
Monetary policy
5
Forecasts and final remarks Outlook for the Mexican economy
31
Economic Activity Forecasts Fan Chart: GDP Growth Annual %, s. a. 6
2019 Q4
Observed Central Scenario Jul-Sep 2019 Report Central Scenario Oct-Dec 2019 Report
5
2020 Q4
2021 Q4
6 5
4
4
3
3
2
2
1
1
0
0
-1
-1
-2
-2
-3
-3 Q2
Q4 2013
Q2
Q4 2014
Q2 Q4 2015
Q2 Q4 2016
Q2 Q4 2017
Q2 Q4 2 018
Q2
Q4 2019
Q2 Q4 2020
Q2
Q4 2021
s. a. / Seasonally adjusted series. Source: INEGI and Banco de México.
GDP Growth % Report 2020 2021
QR Jul-Sep 2019 QR Oct-Dec 2019 0.8 - 1.8 0.5 - 1.5 1.3 - 2.3 1.1 - 2.1
Increase in Number of IMSS-insured Jobs Thousands Report 2020 2021
QR Jul-Sep 2019 QR Oct-Dec 2019 500 - 600 440 - 540 510 - 610 470 - 570 Outlook for the Mexican economy
Current Account Deficit % of GDP Report 2020 2021
QR Jul-Sep 2019 QR Oct-Dec 2019 1.4 0.9 1.7 1.5 32
Risks for Growth Scenario in the Forecast Horizon In an environment of marked uncertainty, the persistent external and domestic risk elements cause the balance of risks for Mexican economic activity to remain biased to the downside. Downward risks
•
An escalation of trade tensions.
•
A deceleration of the global economy and world trade, including the effects of the coronavirus (Covid -19) outbreak.
•
Episodes of volatility in international financial markets.
•
Greater and more persistent weakness of aggregate demand components.
•
Further deterioration of Pemex’ or the sovereign credit ratings.
•
Lower-than-expected public spending.
•
That the final ratification of the USMCA leads to higher-than-expected investment.
•
Greater-than-anticipated dynamism of industrial production in the United States.
•
Greater-than-anticipated dynamism of aggregate demand.
Upward risks
Outlook for the Mexican economy
33
Forecasts are slightly adjusted upwards starting from Q2 2020, due to: 1) an upward revision in non-core inflation (due to higher agricultural and livestock prices that are partially offset by lower increases in energy prices); 2) effect of wage increases, partly offset by an expectation of wider slack conditions.
 Annual headline inflation is expected to lie at 3% starting in Q1 2021. 8.0
Observed inflation Central Scenario Jul-Sep 2019 Report Central Scenario Oct-Dec 2019 Report Headline inflation target
7.5 7.0 6.5
Fan Chart: Annual Headline Inflation 1/ %
Next Q4
8.0
Q6
7.5 7.0 6.5
6.0
6.0
5.5
5.5
5.0
5.0
4.5
4.5
4.0
4.0
3.5
3.5
3.0
3.0
2.5
2.5
2019 Q3 Q4
2.0 1.5
QR Oct-Dec 3.3 2019 QR Jul-Sep 3.3 2019
1.0 0.5 0.0 Q2
Q4
2015
Q2
Q4
2016
Q1
2020 Q2 Q3
Q4
Q1
2021 Q2 Q3
2.0
Q4
1.5
2.9 3.3 3.3 3.4 3.2 3.0 3.0 3.1 3.0
1.0
3.0 3.5 3.1 3.1 3.0 2.8 2.9 2.9
0.5 0.0
Q2
Q4
2017
Q2
Q4
2018
Q2
Q4
2019
Q2
Q4
2020
Q2
Q4
2021
1/ Quarterly average of annual headline inflation. The next four and six quarters are indicated as of first quarter of 2020, that is, the first and third quarter of 2021, respectively; periods in which the monetary policy transmission channels fully operate. 2/ Forecast since February 2020. 3/ Forecast since November 2019. Source: Banco de MĂŠxico and INEGI.
Outlook for the Mexican economy
34
Similarly, the trajectory for annual core inflation is slightly adjusted to the upside, although it maintains a declining trend and is expected to lie at 3% starting in Q4 2020. Fan Chart: Annual Core Inflation 1/ %
6.0
Next Q4
Observed inflation
5.5
6.0
Q6
5.5
Central Scenario Jul-Sep 2019 Report Central Scenario Oct-Dec 2019 Report
5.0
5.0
Headline inflation target
4.5
4.5
4.0
4.0
3.5
3.5
3.0
3.0
2.5
2019 Q3 Q4
2.0
QR Oct-Dec 3.8 2019 QR Jul-Sep 3.8 2019
1.5 1.0 Q2
Q4 2015
Q2
Q4 2016
Q1
2020 Q2 Q3
Q4
Q1
2021 Q2 Q3
2.5
Q4
2.0
3.6 3.6 3.3 3.2 3.0 2.9 2.9 2.9 2.9 1.5
3.6 3.6 3.2 3.1 2.9 2.8 2.9 2.9
Q2
1.0 Q4
2017
Q2
Q4 2018
Q2
Q4 2019
Q2
Q4 2020
Q2
Q4 2021
1/ Quarterly average of annual core inflation. The next four and six quarters are indicated as of first quarter of 2020, that is, the first and third quarter of 2021, respectively; periods in which the monetary policy transmission channels fully operate. 2/ Forecast since February 2020. 3/ Forecast since November 2019. Source: Banco de MĂŠxico and INEGI.
Outlook for the Mexican economy
35
Risks to Inflation Outlook within the Forecast Horizon In this context, uncertainty remains regarding the balance of risks for the described path for inflation. Upward risks
•
Core inflation’s resistance to decline.
•
Wage increases that affect the labor market and prices.
•
A possible exchange rate adjustment due to external and domestic factors, including greater risk aversion due to the coronavirus (Covid -19) outbreak.
•
Greater-than-expected increases in agricultural and livestock prices.
•
A deterioration in public finances.
•
Lower international prices of energy products due to the coronavirus outbreak.
•
A widening in slack conditions.
•
An additional appreciation of the exchange rate.
Downward risks
Outlook for the Mexican economy
36
Final remarks ❶ The global economy continued to decelerate. ❷ World financial conditions remain loose, although volatility has been observed. ❸ Although several risks for the global economic outlook have diminished, others have emerged such as the
coronavirus outbreak.
❹ In Mexico, annual headline inflation decreased considerably in H2 2019, although, as anticipated, it rebounded
at the beginning of 2020.
❺ Slack conditions widened more than anticipated. ❻ Annual headline inflation is expected to lie at 3% in Q1 2021, remaining at levels consistent with the inflation
target in the rest of the forecast horizon.
❼ Economic activity in Mexico is expected to begin its recovery. ❽ It is key to boost confidence in the country, strengthen the economy’s fundamentals, and address the obstacles
that have prevented the economy from achieving greater medium-term growth. Generate incentives that foster a higher efficiency in resource allocation. Strengthen the rule of law. Outlook for the Mexican economy
37