Mexicosmonetarypolicyandeconomicoutlook

ManuelSnchez
UnitedStatesMexicoChamberofCommerce,LosAngeles,CA,November15,2013

Monetarypolicyandeconomicoutlookthemes
Output slowdown and signs of an incipient rebound
More stringent international financial conditions
Lower inflation and monetary flexibility
The possibilities from structural reforms

Mexicosmonetarypolicyandeconomicoutlook

Since the middle of 2012 the Mexican economy slowed,

and in 2Q13 output fell
RealGDP
Quarterlyandannualchange,%,s.a.
8

2
1

1
0
2
2

3
Quarterly

Annual(leftaxis)
6

6
Q1
2007

Q3

Q1
2008

Q3

Q1
2009

Q3

Q1
2010

Q3

Q1
2011

Q3

Q1
2012

Q3

Q1
2013

s.a./Seasonallyadjusted
Source:INEGI
Mexicosmonetarypolicyandeconomicoutlook

The origin of the declining growth seems to have lied first in softer
external demand and then in a contraction of domestic investment
Realaggregatedemand
Quarterlychange,%,s.a.
3

1
Exportsofgoodsandservices
Investment

3
Q1
2012

Q2

Q3

Q4

Q1
2013

Q2

s. a. / Seasonally adjusted
Source: INEGI
Mexicosmonetarypolicyandeconomicoutlook

As for external demand, the slowing of manufacturing

exports translated into stagnant factory output
Manufacturing
2008=100,s.a.
150

110

Dollarvalueofexports
Realproduction(leftaxis)

105

130
100
110

95

90
90
85

Sep13

May13

Jan13

Sep12

May12

Jan12

Sep11

May11

Jan11

Sep10

May10

Jan10

Sep09

May09

Jan09

Sep08

May08

Jan08

Sep07

May07

70
Jan07

80

s. a. / Seasonally adjusted and trend

Source: Banco de Mxico and INEGI
Mexicosmonetarypolicyandeconomicoutlook

As for investment, rising purchases of machinery and equipment

have not compensated for the fall in construction investment
Totalfixedinvestment
2008=100,s.a.
130

120

110

100

90
Construction

80

Machineryandequipment

May13

Jan13

Sep12

May12

Jan12

Sep11

May11

Jan11

Sep10

May10

Jan10

Sep09

May09

Jan09

Sep08

May08

Jan08

Sep07

May07

Jan07

70

s. a. / Seasonally adjusted and trend

Source: INEGI
Mexicosmonetarypolicyandeconomicoutlook

 which mainly reflects lower expenditures in public works

and private housing building
Realconstructionoutput
2008=100,s.a.
140

120

100

80
Public
Privatehousing
60

May13

Jan13

Sep12

May12

Jan12

Sep11

May11

Jan11

Sep10

May10

Jan10

Sep09

May09

Jan09

Sep08

May08

Jan08

Sep07

May07

Jan07

40

s. a. / Seasonally adjusted and trend. The seasonal adjustment and the trend were prepared by Banco de Mxico with
data from INEGI
Source: INEGI
Mexicosmonetarypolicyandeconomicoutlook

These shocks have weakened labor market conditions

Realwagebillandemployment
2008=100,thousands
48,000

105
Realwagebill

47,000

Employees(leftaxis)
46,000

100

45,000
44,000

95

43,000
90

42,000
41,000

85

40,000
39,000

80

38,000
Q1
2007

Q3

Q1
2008

Q3

Q1
2009

Q3

Q1
2010

Q3

Q1
2011

Q3

Q1
2012

Q3

Q1
2013

Q3

Source: Own calculations with data from INEGI

Mexicosmonetarypolicyandeconomicoutlook

Lower consumer confidence has coincided with the first

decline of consumption during the postcrisis period
Retailsalesandconsumerconfidence
2008=100,s.a.
110

120
Consumerconfidence
Retailsales(leftaxis)

Sep13

May13

Jan13

Sep12

May12

Jan12

Sep11

May11

Jan11

Sep10

May10

Jan10

Sep09

May09

80
Jan09

90
Sep08

90

May08

95

Jan08

100

Sep07

100

May07

110

Jan07

105

s. a. / Seasonally adjusted and trend

Source: INEGI and Banco de Mxico
Mexicosmonetarypolicyandeconomicoutlook

Economic activity decelerated in spite of extraordinarily

favorable financial conditions in the first part of the year
Yieldcurve
%
8
December30,2011
December31,2012

May10,2013
6

30year

20year

10year

7year

5year

3year

1year

6month

3month

1month

1day

Source: Proveedor Integral de Precios (PiP)

Mexicosmonetarypolicyandeconomicoutlook

10

The financial bonanza was shared with other emerging

markets
Emergingeconomies:accumulatedcapitalinflows1
BillionU.S.dollars
100
2012
2013
80

May

60

40

20

51

49

47

45

43

41

39

37

35

33

31

29

27

25

23

21

19

17

15

13

11

20

1/ Equity and debt

Source: Emerging Portfolio Fund Research
Mexicosmonetarypolicyandeconomicoutlook

11

 largely as a result of expansionary monetary policies in

advanced countries
Centralbankassets
2007=100,localcurrency
500
FederalReserve
BankofEngland
400

ECB
BankofJapan

300

200

100

Sep13

May13

Jan13

Sep12

May12

Jan12

Sep11

May11

Jan11

Sep10

May10

Jan10

Sep09

May09

Jan09

Sep08

May08

Jan08

Sep07

May07

Jan07

Source:Haver Analytics

Mexicosmonetarypolicyandeconomicoutlook

12

Mexico has been one of the preferred destinations of

portfolio capital flows
Emergingeconomies:foreignholdingsoflocalgovernmentbonds1
Percentageoftotalgovernmentsecuritiesincirculation
70
NewZealand
60
Peru
Malaysia

50

Mexico

40

Poland
30
Turkey
20

Thailand
Korea

10

Brazil
0
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
2010 2011
2012
2013
1/Federalgovernmentdebtissuedonthedomesticmarket,inlocalcurrency
Source:Selectedcountries centralbanksandfinanceministries
Mexicosmonetarypolicyandeconomicoutlook

Q2

Q3

13

Since May, market anticipation of tapering translated into

lower asset prices for emerging markets, including Mexico
Yieldcurve
%
8
May10,2013
September18,2013

November14,2013
6

30year

20year

10year

7year

5year

3year

1year

6month

3month

1month

1day

Source: Proveedor Integral de Precios (PiP)

Mexicosmonetarypolicyandeconomicoutlook

14

It is likely that international financial conditions will be less

benign in the future
So far financial adjustments have occurred in an orderly way
Capital outflows were not extraordinary
Foreign holdings of government bonds declined only
modestly
Foreign exchange market remained highly liquid
However, given the uncertainty over the future course of U.S.
monetary policy, new bouts of volatility cannot be ruled out

Mexicosmonetarypolicyandeconomicoutlook

15

Some indicators suggest that economic activity might have

somewhat picked up in 3Q13
GlobalEconomicActivityIndicator
2008=100,s.a.

Manufacturing
110

2008=100,s.a.

111

145

110
140
109

109
135
Dollarvalueofexports

108

Production(leftaxis)

s. a. / Seasonally adjusted
Source: Mexican National Accounts System (SCNM), INEGI

107
Sep13

Aug13

Jul13

Jun13

May13

130
Apr13

Aug13

Jul13

Jun13

May13

Apr13

108

s. a. / Seasonally adjusted
Source: Banco de Mxico and INEGI

Constructioninvestment

Servicesproduction

2008=100,s.a.

2008=100,s.a.
115

94

114
113

93

s. a. / Seasonally adjusted
Source: Mexican National Accounts System (SCNM), INEGI

Aug13

Jul13

Jun13

Aug13

Jul13

Jun13

May13

Apr13

112

s. a. / Seasonally adjusted
Source: INEGI

Mexicosmonetarypolicyandeconomicoutlook

16

The 2014 fiscal package will impact inflation, economic

activity, and the use of financial resources

Estimatedeffectsoffiscalpackagefor2014
Effects
Annualinflation(endofyear)
GDPgrowth

40basispoints
0.2percentagepoints

Increaseinpublicsectorborrowingrequirements

1.2percentagepointsofGDP

Source:BancodeMxico(2013), InformesobrelaInflacinJulio Septiembre2013,November

Mexicosmonetarypolicyandeconomicoutlook

17

The economy is expected to recover gradually in 2014 and

2015
GDPforecast
Annualgrowth,%
6

BanxicoSurvey1
BanxicoInflationReport

5.2

4.0

4.5
4.2

4.0
3.4
3.0

3.2

3.4
3

2.5
1.4

1.7
1.2

0.9
0.5

0
201320142015
1/ Maximum, average and minimum
Source: Banco de Mxico (2013), Encuesta sobre las expectativas de los especialistas en economa del sector privado,
October; Banco de Mxico (2013), Informe sobre la Inflacin Julio Septiembre 2013, November; and LatinAmerican
Consensus Forecasts, October
Mexicosmonetarypolicyandeconomicoutlook

18

Downsideriskstothisscenarioseemtoprevail
A pause in the U.S. economic recovery
Heightened global risk aversion
Further deterioration of the construction sector in Mexico
Weakening consumer confidence

Mexicosmonetarypolicyandeconomicoutlook

19

During the last decade, monetary policy has been focused

on achieving a 3 percent permanent inflation target
Monetarypolicyinterestrate1
Annual,%
9

Sep13

May13

Jan13

Sep12

May12

Jan12

Sep11

May11

Jan11

Sep10

May10

Jan10

Sep09

May09

Jan09

Sep08

May08

Jan08

1 / Since January 21, 2008

Source: Banco de Mxico
Mexicosmonetarypolicyandeconomicoutlook

20

Annual headline inflation has consistently remained below

historical levels
Annualheadlineinflation
%
18

15

12

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

Source:INEGI

Mexicosmonetarypolicyandeconomicoutlook

21

Monetary accommodation during 2013 has not endangered

the convergence to the 3 percent inflation target
Factors behind monetary policy decisions
Significant deceleration of the economy
Foreseeable decline in inflation
Given the current fiscal policy no further cuts in the policy
interest rate are warranted in the future
Closing future output gap
Real monetary policy interest rate already close to zero

Mexicosmonetarypolicyandeconomicoutlook

22

In 2013, after a temporary spike resulting from agricultural

price shocks, annual inflation has recently fallen
Annualinflation
%
7
Headline
Core

6
5
4
3
2
1

Oct13

Sep13

Aug13

Jul13

Jun13

May13

Apr13

Mar13

Feb13

Jan13

Source:INEGI

Mexicosmonetarypolicyandeconomicoutlook

23

The persistent gap between medium and longterm

inflation expectations and the target remains a challenge
Inflationexpectations
%
7
6
Next4years

Next58years
5
4
3
2
1

Sep13

Jul13

May13

Mar13

Jan13

Nov12

Sep12

Jul12

May12

Mar12

Jan12

Nov11

Sep11

Jul11

May11

Mar11

Jan11

Source:BancodeMxico
Mexicosmonetarypolicyandeconomicoutlook

24

Shortterminflationrisksshouldcontinuetobemonitored
Secondround effects from
Higher than expected impact from tax changes
Higher financial volatility
Upward pressures from noncore price components

Mexicosmonetarypolicyandeconomicoutlook

25

Mexico should tackle the most important problem that has

inhibited longterm economic growth
Mexico:growthaccounting1
Averageannualchange,%
19501980

19802012

3.4

0.8

Totalfactorproductivity

2.8

0.6

Capitalcontribution

0.6

0.7

Laborcontribution

0.0

0.6

Laborintensity

0.2

0.1

Proportionofworkingagepopulation

0.2

0.7

GDPpercapita

1/ Own calculations based on data from World Development Indicators, International Financial Statistics, Conference Board Total
Economy Database; and data and theoretical formulation of Kehoe, T.J. and F. Meza, (2011), Catchup Growth Followed by
Stagnation: Mexico, 19502010, Latin American Journal of Economics, 48(2). The sum of the parts may not add up due to rounding

Mexicosmonetarypolicyandeconomicoutlook

26

The current reform agenda seeks to bring significant

productivity gains
Some salient features
Hiring and firing flexibility will increase labor productivity
Competitive conditions for teachers may eventually favor the
quality of education
The entry of new players could provide wider and cheaper
access to telecommunications services
Private participation in energy may lower key input prices
Full benefits require
Efficient secondary legislation
Adequate implementation
Mexicosmonetarypolicyandeconomicoutlook

27

Summary
Sustained economic recovery will require the support of external
demand and the revival of the construction industry
It is likely that international financial conditions will be less
supportive in the future
Medium and longterm inflation expectations have remained
stable in spite of recent spikes in agricultural prices
Given the current fiscal policy no further cuts in the policy
interest rate are warranted in the future
Adequate implementation of structural reforms may foster long
term economic growth
Mexicosmonetarypolicyandeconomicoutlook

28

Mejoranlasperspectivaseconmicasmundiales

29