Growth in Spite of Politics

Growth in Spite of Politics

GIC Central Banking Series Fayetteville, November 2017

Euro appreciation, a sign of what?

Unanticipated recent appreciation ($/â‚Ź)

1.35 1.30 1.25

Forecast range (Oct 17)

1.20 1.15 1.10

Forecast range (Dec 16)

1.05

1.00 0.95

Jan-19

Oct-18

Jul-18

Apr-18

Jan-18

Oct-17

Jul-17

Apr-17

Jan-17

Oct-16

Jul-16

Apr-16

Jan-16

0.90

Over the last 6 months, it has been more of a Euro strength than a dollar weaknesses story Source: CX, Bloomberg

-2-

European economy continues to expand

-3-

A more synchronized growth momentum, with EMs gaining traction, particularly Latin America GDP growth 2017

Recession Stagnation Mild growth Strong growth

Source: CX- Economics and Consensus Forecast

-4-

European growth on cruise control, in spite of uncertainty Observed GDP growth and CF expectations US 5.0

EZ growth to remain around 2.0%

CF

Observed

FED

4.0 3.0

Bye, bye, deflation. But no inflation

2.0 1.0

Political economy dominates economic policy

2014

2015

t-24 t-12 Now

t-24 t-12 t-6

2013

t-24 t-12 t-6

t-24 t-12 t-6

2 2012

t-24 t-12 t-6

0.0 t-24 t-12 t-6

ECB to remain cautious. What do they see that I don’t?

2016

2017

Euro Area 2.5

ECB

2.0 1.5

1.0 0.5 0.0

-0.5 t-24 t-12 t-6

t-24 t-12 t-6

t-24 t-12 t-6

t-24 t-12 Now

2012

t-24 t-12 t-6

-1.0 t-24 t-12 t-6

Risk of contagion from political/policy events abroad

2013

2014

2015

2016

2017

Source: CX and Consensus Forecast

-5-

Diverging monetary policy, for how long?

Short term rates US, Mexico and Eurozone (%) 8.0

MX analysts

7.0 6.0 5.0 4.0 3.0

US analysts 2.0

US markets

1.0 0.0

Dec-18

Dec-17

Dec-16

Dec-15

Dec-13

Dec-12

Dec-11

Dec-10

Dec-09

Dec-08

Dec-07

Dec-06

Dec-05 Source: Eikon, Bloomberg and Banxico

Dec-14

Euro area

-1.0

-6-

ECB, still very accommodative Inflation in the Eurozone (% yoy) 4.0

32%

Expectations (5y swap)

3.5 3.0

28%

2.5

2.0

20%

Core

1.0

5 years

24%

Target

1.5

Probabilidad de Deflación (%)

10 years

16%

0.5

12%

0.0 -0.5

8%

Sep-17

Sep-16

Sep-15

Sep-14

Sep-13

Sep-12

Sep-11

-1.0

Euro area policy rate (%)

5.0

4% 0% 2014

2015

2016

2017

4.0

Policy rate

3.0

Policy rate minus current CPI

2.0 1.0

But how much is too much?

0.0 -1.0 -2.0

Source: ECB and Bloomberg.

Oct-17

Oct-16

Oct-15

Oct-14

Oct-13

Oct-12

Oct-11

Oct-10

Oct-09

Oct-08

Oct-07

Oct-06

-3.0

Why continue expanding balance? What do they know that I don’t?

-7-

Political economy is the main cloud in the horizon Italian elections

Catalonia

Brexit 12000

3700

Stocks

Polling intention (%)

Way back not ruled out

3650

Eurostoxx

11500

3600

3550

11000

3500 10500

3450 3400

10000

Soft/hard

Spa

3300

9500

Terr.

Diada Ref attack .

9000

Spread

150

Early elections, Corbin is back, soft Brexit

3350

Spa

3250 3200 220 210

140

200

130

190 120

Source: TermĂłmetro PolĂ­tico.

180

110

170

Ita

100

Softer tone but still a risk for Europe

Quite a local risk at this point

oct-17

sep-17

ago-17

jul-17

jun-17

may-17

abr-17

mar-17

150

feb-17

90

ene-17

Uncertainty even higher than pre-referendum

160

Markets do not price independency though they foresee slightly lower growth -8-

Electoral risk, “another” “new” normal Populism has no color

Left

2018 11 countries

Right

2017 11 countries

-9-

Improving outlook for the coming years 2017 GDP Growth

2018-2022 GDP Growth (average)

2.2%

2.8%

4.0% 4.7% 3.0%

4.1%

1.0% -3.0%

3.0% -1.3% 3.7%

3.8%

5.0% 3.6%

5.2% 3.7%

-12.0%

1.6%

-2.4% 3.6%

0.2%

1.2% 2.5%

0.7%

3.8%

4.2%

1.4%

2.4%

3.8%

2.9% 2.5%

2.9%

Recession Stagnation Mild growth Strong growth

Source IMF and CX.

- 10 -

Currencies reacting to policy expectations

Mexican Peso moving with “rumors” and “news” 23 22 21 20 19 18 17

Nov-17

Sep-17

Jul-17

May-17

Mar-17

Jan-17

Nov-16

Sep-16

Jul-16

May-16

Mar-16

Jan-16

16

- 11 -

Mexico in the center of the US political agenda

1

High trade deficits

Outsourcing

2

US: trade balance in goods with China and Mexico

(Millions of persons)

China WTO Access

China WTO access

NAFTA

0.5

Immigration

Foreign-born population in the US, 1850 to 2015

US: employees in the manufacturing sector

(% of GDP) NAFTA

3

(manufacturing)

Millions

19

1924 National Origins Quota Act

50

% of total population

18

0.0

40

17

-0.5

16

Mexico

14

China

-1.5

20

13 12

-2.0

%

16

43.3

14

13.5

30

15

-1.0

1965 Immigration and Nationality Act

12 10

Total foreignborn population

8

10

6

0

4

2015

2012

2009

2006

2003

2000

1997

1994

1991

1988

10 1985

2015

2012

2009

2006

2003

2000

1997

1994

1991

1988

1985

-2.5

1850 1860 1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 2020

11

Source: US Census Bureau and BLS

- 12 -

Currencies reacting to policy expectations

Mexican Peso moving with “rumors” and “news” 23 22 21 20 19 18 17

Nov-17

Sep-17

Jul-17

May-17

Mar-17

Jan-17

Nov-16

Sep-16

Jul-16

May-16

Mar-16

Jan-16

16

- 13 -

NAFTA: probably yes, but when?

US- MX trade scenarios (from worst to best for Mexico)

The most controversial issues, finally on the table •

Trade deficit reduction

•

Regional rules of origin and national content (automotive sector)

•

“Sunset clause” (5-year validation)

•

Dispute resolution

• 3. NAFTA slow renegotiation (2019-2020)

Restrict access to government procurement in the US (“America First”)

4. NAFTA quick renegotiation (early 2018)

Mexico and Canada have no incentive to leave the negotiating table

1. US out of WTO

2. No NAFTA

All parts have incentives for a quick renegotiation of NAFTA, but nobody wants to waive their claims (and the clock is ticking) - 14 -

Political uncertainty will increase as the 2018 electoral process approaches Facing the biggest-ever election with a high level of complexity

•

An “exotic” cocktail has fueled AMLO’s popularity: anti-PRI sentiment, unattractive political parties, uncertain political alliances, corruption.

•

AMLO is leading the polls, but he is the only declared contender so far (AMLO vs. himself)

Anti-AMLO vs anti-PRI election

Investors remain cautions about a potential victory of AMLO Uncertainty and FX volatility likely to resume as election nears Source: GEA, CX-Economics, Citibanamex, and, Parametria

- 15 -

Growht in Spite of Politics Manuel Balmaseda CEMEX Chief Economist

GIC Central Banking Series Fayetteville, November 2017