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