Quarterly Report. April June 2018 August 29th, 2018

Transcription

1 Quarterly Report April June August 9th,

2 Outline External Conditions Evolution of the Mexican Economy Inflation Monetary Policy Forecasts and Final Remarks Quarterly Report April - June

3 The world economy continued to grow and it is anticipated to continue expanding for the rest of and 9. However, the performance of the main advanced economies has become more diverse. GDP Growth Forecasts Annual % change 8 July Forecasts October 7 October 7 7 Selected Economies: and 9 GDP Growth Forecasts Annual % change April July.. Emerging.. World.. Advanced. U.S. Eurozone Japan United Kingdom Source: IMF, WEO October 7 and July. Source: IMF, WEO October 7, April and July. Quarterly Report April - June

4 8 8 Although slack in advanced economies continued to decrease, there are differences in the growth rate of wages. Advanced Economies Eurozone Output Gap % of potential GDP United Kingdom U.S. Japan Forecasts Unemployment Gap Percentage points U.S. United Kingdom Eurozone Japan May June July Wage Indicators Annual % change, s. a. United Kingdom U.S. Eurozone Japan June July Source: IMF, WEO April. Source: Prepared by Banco de México with data from CBO, OECD, Economic Outlook, November 7 and National Statistical Offices. s. a. / Seasonally adjusted figures. Note: Wage indicators for the U.S., Eurozone, United Kingdom, and Japan correspond to average hourly earnings, negotiated wages, average weekly earnings, and average monetary compensation, respectively. Source: Prepared by Banco de México with data from CBO, OCDE, Economic Outlook, November 7 and National Statistical Offices; BLS, BCE, Bloomberg and ONS. Quarterly Report April - June

5 7 7 Likewise, inflation continued to increase gradually in the main advanced economies, although differences across the countries became more pronounced as well. Advanced Economies: Inflation Annual % change Headline Core United Kingdom United Kingdom Eurozone U.S. / U.S. / Eurozone Japan Japan - June July - June July - / U.S. figures correspond to the implicit price deflator for personal consumption expenditures. Source: Haver Analytics and International Monetary Fund. Quarterly Report April - June / U.S. figures correspond to the implicit price deflator for personal consumption expenditures. Japan figures exclude fresh food and energy, as well as the effect of the higher consumption tax. Source: Haver Analytics and International Monetary Fund.

6 Dec- Jun- Dec- Jun- Dec- Jun-7 Dec-7 Jun-8 Dec-8 Jun-9 Dec-9 In the context described, there was a greater divergence between the pace at which the main central banks have adjusted their monetary stance, as well as the pace at which they are expected to continue approaching a more neutral stance. In particular, the Federal Reserve is expected to continue normalizing its stance at a faster pace than other advanced economies central banks. Expected Monetary Policy Rates Implicit in OIS Curve / % Implied target rate in OIS curve August 8 th, End of End of 9.. Prospective Distribution of the Reference Rate at the end of 9 Implicit in Options / Density Mode Mar, :.% Jun 8, :.8% Aug 8, :.8% United States.87% (Aug-8) Federal Reserve / Bank of England Bank of Japan European Central Bank % -.%.%.%.%.%.%.%.%.%.%.% Mode Mar, :.7% Jun 8, :.% Aug 8, :.8% Canada.% (Aug-8) -.% -.%.%.%.%.%.%.%.%.%.%.% Mode Mar, :.9% Jun 8, :.9% Aug 8, :.% United Kingdom.7% (Aug-8) -.% -.%.%.%.%.%.%.%.%.%.%.% Mode Eurozone Mar, : -.8%.% Jun 8, : -.% (Aug-8) Aug 8, : -.8% -.% -.%.%.%.%.%.%.%.%.%.%.% / OIS: Fixed-For-Floating swap where the fixed interest rate is the reference rate. / Data for the observed federal funds rate corresponds to the average between the lower and upper bounds of the range (.7% -.%). / The implicit distribution of the reference rate is obtained by the changes in interest rates implicit in options over the -month rates futures (LIBOR in the U.S. and United Kingdom, EURIBOR in the Eurozone and bankers acceptance in Canada). It is assumed that the spread between the reference rate and the -month rate is maintained constant. The implicit distribution in options uses the Breeden-Litzenberger method. Source: Bloomberg. Quarterly Report April - June

7 Jan- Mar- May- Jul- Sep- Nov- Jan-7 Mar-7 May-7 Jul-7 Sep-7 Nov-7 Jan-8 Mar-8 May-8 Jul-8 Jan- Mar- May- Jul- Sep- Nov- Jan-7 Mar-7 May-7 Jul-7 Sep-7 Nov-7 Jan-8 Mar-8 May-8 Jul-8 Jan- Mar- May- Jul- Sep- Nov- Jan-7 Mar-7 May-7 Jul-7 Sep-7 Nov-7 Jan-8 Mar-8 May-8 Jul-8 Thus, interest rates in the U.S. increased and the U.S. dollar showed a generalized strengthening. -Year Advanced Economies: Government Bonds Interest Rates %. -Year. United States: Dollar Index (DXY) / Index U.S... Appreciation United Kingdom... U.S Eurozone Japan United Kingdom Japan Eurozone August -. August -. August 8 Source: Bloomberg. Source: Bloomberg. Quarterly Report April - June / The U.S. dollar index corresponds to the weighted average of the value of the dollar relative to a basket of six currencies: EUR: 7.%, JPY:.%, GBP:.9%, CAD: 9.%, SEK:.%, y CHF:.%. Source: Bloomberg.

8 Jan- Apr- Jul- Oct- Jan-7 Apr-7 Jul-7 Oct-7 Jan-8 Apr-8 Jul-8 Jan- Apr- Jul- Oct- Jan-7 Apr-7 Jul-7 Oct-7 Jan-8 Apr-8 Jul-8 International financial markets registered bouts of volatility, related, in part, to greater trade tensions, the risk of a tightening of monetary conditions and certain geopolitical factors. U.S. stock indices continue showing gains, which is in part attributed to tax reductions. In this context, there were few changes in the asset prices of other advanced economies. VIX / Index Advanced Economies: Stock Markets Index -Jan-= S&P FTSE Nikkei Europe 9 August August 8 / The VIX Index is a weighted implied volatility indicator for the S&P. Source: Bloomberg. Source: Bloomberg Quarterly Report April - June 7

9 Jan-7 Mar-7 May-7 Jul-7 Sep-7 Nov-7 Jan-8 Mar-8 May-8 Jul-8 Jan-7 Mar-7 May-7 Jul-7 Sep-7 Nov-7 Jan-8 Mar-8 May-8 Jul-8 Capital inflows to emerging economies continued to decline, and financial asset prices had a predominantly negative performance. Emerging Economies Accumulated Capital Flows (Debt and Equity) / Billions of dollars 7 Nominal Exchange Rate against USD Index -Jan-7 = Depreciation Market Indicators that Measure the Domestic Sovereign Credit Risk / Basis points 7 August th Colombia Chile Korea Turkey Brazil Mexico August 8 8 Korea Turkey Colombia Chile Brazil Mexico August Weeks / The sample covers funds used for the buying-selling of stocks and bonds from emerging countries, recorded in advanced countries. Flows exclude portfolio performance and changes in the exchange rate. Source: Emerging Portfolio Fund Research. Source: Bloomberg. / This refers to -y ear Credit Default Swaps. Source: Bloomberg. Quarterly Report April - June 8

10 Risks to World Economic Outlook Risks to the world economy have increased both in the short and in the medium term. There are significant risks to the global outlook: A change in the economic and trade integration model. A greater-than-anticipated slowdown of the Chinese economy. There are other risks that could lead to tighter global financial conditions, which could further limit the sources of financing for emerging economies: In the U.S., a greater-than-estimated increase of inflation could lead to a faster adjustment of the monetary policy than currently expected. A further deterioration of macroeconomic conditions in certain emerging economies, in particular those with high indebtedness levels, either public or private, and macroeconomic imbalances. An escalation of geopolitical conflicts. Finally, one of the main risks is that, having a complacent attitude or taking actions that undermine the fundamentals of their economies, the authorities of the main economies fail to carry out the actions necessary to promote sustained growth and to guarantee the stability of international financial markets. Quarterly Report April - June 9

11 Outline External Conditions Evolution of the Mexican Economy Inflation Monetary Policy Forecasts and Final Remarks Quarterly Report April - June

12 In Q, economic activity contracted with respect to Q, which stands in contrast with the recovery observed over the previous two quarters. Gross Domestic Product Quarterly % change, s. a. Global Indicator of Economic Activity Index =, s. a. Total Services Industrial Activity Index =, s. a. Manufactures Electricity, Water and Gas Industrial Construction 9 Mining Agricultural Q - 9 June 8 June 7 s. a. / Seasonally adjusted data. Source: Source: Mexico s National Accounts System (SCNM), INEGI. s. a. / Seasonally adjusted data. Source: Mexico s National Accounts System (SCNM), INEGI. Quarterly Report April - June s. a. / Seasonally adjusted data. Source: Monthly Industrial Activity Indicator, Mexico s National Accounts System (SCNM), INEGI.

13 7 7 7 In particular, investment lost momentum as compared to the incipient recovery displayed at the end of 7 and in early. Investment and its Components Index =, s. a. Investment in Residential and Non-residential Construction Index =, s. a. Real Value of Construction Output by Contracting Institutional Sector / Index Jan-=, s. a. Domestic Machinery and Equipment Imported Machinery and Equipment Construction Total May 9 9 Residential Non-residential May Private Excluding Housing Private Housing Public Private Total June 7 7 s. a. / Seasonally adjusted data. Source: Mexico s National Accounts System (SCNM), INEGI. s. a. / Seasonally adjusted data. Source: Mexico s National Accounts System (SCNM), INEGI. Quarterly Report April - June s. a. / Seasonally adjusted data. / Seasonally adjusted by Banco de México, except for the total. Source: Prepared by Banco de México with data from ENEC, INEGI.

14 7 7 7 In contrast, private consumption maintained a positive trend, supported by the performance of the real wage bill and of workers remittances. Monthly Indicator of Private Consumption and its Components Index =, s. a.. Workers Remittances USD and constant pesos billions, s. a 8. Consumer Confidence Index and Total Real Wage Bill Index =, s. a. Imported Goods Total Domestic Services Domestic Goods Mexican Pesos / Real Wage Bill Consumer Confidence Index May U.S. Dollars June.8 8. Q July 7 s. a. / Seasonally adjusted data. Source: Mexico s National Accounts System (SCNM), INEGI. s. a. / Seasonally adjusted data. / Prices as of the second fortnight of December. Source: Banco de México and INEGI. s. a. / Seasonally adjusted data. Source: Prepared by Banco de México with data from the National Employment Survey (ENOE), INEGI and National Consumer Confidence Survey (ENCO), INEGI and Banco de México. Quarterly Report April - June

15 In turn, manufacturing exports showed a degree of weakness. The medium-term trend of the external accounts has reverted, there is a surplus in the non-oil trade balance and a deficit in the oil trade balance. Manufacturing Exports Index =, s. a. Trade Balance USD millions 8, Current Account % of GDP. Automotive Non-oil,, Current Account. Total, -, Rest Total 9 Oil -, -, -8, Moving Average ( Quarters) July 8 Q -, Q -. s. a. / Seasonally adjusted data. Source: Banco de México with data from SAT, SE, Banco de México, INEGI. Merchandise Trade Balance. SNIEG. Information of National Interest. Source: SAT, SE, Banco de México, INEGI. Merchandise Trade Balance. SNIEG. Information of National Interest. Quarterly Report April - June Note: Blue bars with a darker tone refer to the first quarter of each year. Source: Banco de México.

16 Thus, it is estimated that in Q slack conditions presented a greater-than-anticipated easing, mainly as a reflection of the contraction of economic activity in this time frame. As a result, the output gap estimates were positioned at levels close to zero Output Gap / % of potential output, s. a. 8 Monthly Slack Index / % GDP Excluding the Oil Sector / GDP Q - May - s. a. / Estimated with seasonally adjusted data. / Estimated using the Hodrick-Prescott (HP) filter with tail correction; see Banco de México Inflation Report, April- June 9, p.9. / It excludes oil and gas extraction, services related to mining and the manufacture of oil and coal products. Note: Confidence interval of the output gap calculated with an unobserved components method. The dotted line refers to the confidence interval for the gap calculated without the oil sector while the blue area is the interval corresponding to the total GDP. Source: Estimated by Banco de México with data from INEGI and Banco de México. Quarterly Report April - June / Index constructed based on the Model Confidence Set (MCS) methodology; see Banco de México Inflation Report, October December 7. Monthly slack index is based on the first principal component of a set that includes indicators. The first component represents % of joint variation of the monthly indicator. Gray lines correspond to individual slack indicators used in the analysis of Principal Components. Source: Own elaboration with data from INEGI and Banco de México.

17 In turn, slack conditions in the labor market remained tight. Unemployment Rate Labor Market Gap / Percentage points, s. a.. June June Q.... Unemployment Rate and Informal Salaried Workers Average Wage of Salaried Workers according to the National Employment Survey (ENOE) / Annual % change Nominal Real s. a./ Seasonally adjusted data. / Shadows represent confidence bands. The interval corresponds to two average standard deviations among all estimates. Source: Banco de México with data from INEGI (ENOE). / To calculate average nominal wages, the bottom percent and the top 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 México with data from INEGI (ENOE). Quarterly Report April - June

18 Since, the Mexican economy has observed a strong decrease in the financing from external sources, which has been partially offset by an increase of domestic sources and a lower absorption by the public sector resources. Mar- Mar- Sep- Sep- Mar- Mar- Sep- Sep- Mar- Mar- Sep- Sep- Mar- Mar- Sep- Sep- Mar-7 Mar-7 Sep-7 Sep-7 Mar-8 Mar-8 Sources and Uses of Financial Resources Annual flows as % of GDP 7 Q- Total sources Domestic sources / External sources / Total uses International reserves Public sector financing Private sector financing / Domestic External Other concepts / Financing to the Non-financial Private Sector Real annual % change Total / External Domestic / Total Domestic / Q Current Account Deficit Note: Figures expressed in percent of the nominal average annual GDP. / Corresponds to the domestic financial assets aggregate F, which includes the monetary aggregate M plus other instruments held by resident sectors that hold money that are not considered in the monetary aggregates. / Includes the monetary instruments held by non-residents (equivalent to the difference between M and M) and other non-monetary external sources (the external debt of the Federal Government, the external debt of public agencies and companies, the external liabilities of commercial banks, external financing to the non-financial private sector, the raising of agencies, among others). / Includes the financial intermediaries credit, of the National Housing Fund (Infonavit) and Fovissste, the issuance of domestic debt and external financing of firms. / It includes capital accounts, and results and other assets and liabilities of commercial and development banks, non-bank financial intermediaries, of the National Housing Fund (Infonavit) and Banco de México including the securities issued by this Central Institute for the purposes of monetary regulation, especially those related to neutralizing the monetary impact by the operational surplus. Similarly, it includes non-monetary liabilities from the Institute for the Protection of Bank Savings (IPAB), as well as the effect of the change in the valuation of public debt instruments, among other concepts. Source: Banco de México. Firms / Housing Consumption June / Data adjusted due to exchange rate variations. / Data adjusted due to the withdrawal from and the incorporation of some financial intermediaries to the credit statistics. Includes credit from commercial and development banks, as well as other nonbank financial intermediaries. Source: Banco de México. Quarterly Report April - June 7

19 Outline External Conditions Evolution of the Mexican Economy Inflation Monetary Policy Forecasts and Final Remarks Quarterly Report April - June 8

20 7 Over the first five months of, headline inflation decreased. Starting from June some of the upward risks signaled by this Central Bank have materialized: a depreciation of the national currency and higher prices of energy products. This led to considerable increments of non-core inflation, which remains at high levels. Variability Interval Consumer Price Index Annual % change Core Non-core Headline F August Source: Banco de México and INEGI. Quarterly Report April - June 9

21 Core inflation maintained a downward trajectory, in accordance with the previous forecast. This reflects the easing of the cyclical conditions of the economy, the exchange rate appreciation, as well as the effects of the implemented monetary policy actions, which have prevented second-round effects Real Exchange Rate and Relative Price of Merchandise and Services Core Price Index Annual % change Logarithm of index Dec-= Merchandise Services. 9 9 Logarithm of Real Exchange Rate Logarithm of Relative Price /...9 Food, Beverages and Tobacco 7 Services Education Non-food Merchandise Merchandise - Other Services Housing - July F August. F August - F August - / This indicator corresponds to the logarithm of the ratio between the merchandise price index and the services price index. Source: Banco de México with data from Banco de México and INEGI. Source: Banco de México and INEGI. Source: Banco de México and INEGI. Quarterly Report April - June

22 Fundamental core inflation remained below the levels of core inflation, and presented a slight downward pattern, due to the contraction of the economic activity in Q. Core Inflation and Fundamental Core Inflation Annual % change 8 7 Core Fundamental Core F August Source: Banco de México and INEGI. Quarterly Report April - June

23 Throughout the quarter, there were smaller impacts of merchandise prices on headline inflation, while the effect of the services prices remained stable. In turn, the contribution of non-core inflation has increased recently. Consumer Price Index (CPI) Incidences in percentage points Core Livestock Fruits and Vegetables Government Approved Fares Headline Energy F August Core Inflation Non-core Inflation Selected Components of CPI Annual % change and incidences in percentage points Incidences (Bars) Annual % Change (Line) Gasoline Merchandise Incidences (Bars) Annual % Change (Line) F August F August L.P. Gas Incidences (Bars) Annual % Change (Line) Fruits and Vegetables Incidences (Bars) Annual % Change (Line) -. F August F August Source: Banco de México and INEGI. Quarterly Report April - June

24 Outline External Conditions Evolution of the Mexican Economy Inflation Monetary Policy Forecasts and Final Remarks Quarterly Report April - June

25 Monetary Policy Stance To guide its monetary policy actions, the Governing Board closely monitors the evolution of inflation vis-à-vis its expected trajectory, considering the adopted monetary policy stance and the horizon at which it operates, as well as the available information on inflation determinants and medium- and long-term inflation expectations, including the balance of risks to inflation. The Governing Board will maintain a prudent monetary stance and will continue to closely watch: The potential pass-through of exchange rate expectations onto prices. The relative monetary policy stance of Mexico and the U.S. The evolution of slack conditions in the economy. Given the presence and the possible persistence of factors that, by their nature, imply a risk to inflation and inflation expectations, the monetary policy will adjust in a timely and firm manner to attain the convergence to its % target, and to strengthen the anchoring of medium- and long-term inflation expectations, for them to reach this target. Quarterly Report April - June

26 Conduction of Monetary Policy April and May : Rate unchanged at 7.% It was considered the evolution of inflation and that the outlook of its main determinants and their forecasts did not present important changes relative to the expected trajectory, although the Governing Board acknowledged that non-core inflation remained high. June : bp increase to 7.7% It was considered that some risks to inflation started to materialize. In particular: Higher volatility of the Mexican peso and a greater depreciation. Greater-than-expected pressures on gasoline and LP gas prices. As a consequence, the balance of risks to inflation deteriorated. August : Rate unchanged at 7.7% It was considered the loosening of the cyclical conditions in the economy, that the expected trend of core inflation continues to the downside, and that the shocks that recently affected inflation, in particular higher energy prices, are transitory. Quarterly Report April - June

27 Thus, the target for the Overnight Interbank Interest rate is at 7.7%. Based on these actions, and considering the evolution of -month inflation expectations, the short-term interest rate has increased to an ex-ante real level close to.%. Monetary Policy Rate and Consumer Price Index % and annual % change Target for the Overnight Interbank Interest Rate August F August Short-Term Ex-Ante Real Rate and Estimated Range for the Short- Term Neutral Real Rate in the Long-Term / % Short-Term Neutral Real Rate Range in the Long-Term August Headline Inflation Core Inflation Inflation Target Short-Term Ex-Ante Real Rate - - Source: Banco de México and INEGI. Quarterly Report April - June / The short-term ex-ante real rate is constructed using the Target for the Overnight Interbank Interest Rate and -month inflation expectations from Banco de México Survey. The dotted line corresponds to the midpoint of the range. Source: Banco de México.

28 The median of inflation expectations for the end of has increased since some risks to inflation began to materialize. However, the median of inflation expectations for the end of 9 stayed around.%, while the medians of medium- and long-term inflation expectations remained stable at.%. Jan- Apr- Jul- Oct- Jan-7 Apr-7 Jul-7 Oct-7 Jan-8 Apr-8 Jul-8 Jan- Apr- Jul- Oct- Jan- Apr- Jul- Oct- Jan- Apr- Jul- Oct- Jan-7 Apr-7 Jul-7 Oct-7 Jan-8 Apr-8 Jul Headline Core Headline and Core 9 Inflation Expectations Median, % July..... Next -8 Years Long-term Citibanamex Next -8 Years Next Years Market Instruments / Inflation Target August July Break-even Inflation and Inflation Risk Implicit in Bonds % -year Bond Break-even Inflation -day Moving Average August Source: Banco de México Survey (monthly periodicity). / For a description of the estimation of log-term inflation expectations, see the Box Decomposition of Break-even Inflation in the Quarterly Report, October December. The estimate was updated by including data as of November 7. Source: Banco de México Survey (monthly periodicity) and Citibanamex Survey (biweekly periodicity). Quarterly Report April - June Source: Estimated by Banco de México with data from Valmer and Bloomberg. 7

29 Jan- Mar- May- Jul- Sep- Nov- Jan-7 Mar-7 May-7 Jul-7 Sep-7 Nov-7 Jan-8 Mar-8 May-8 Jul-8 Sep-7 Oct-7 Nov-7 Dec-7 Jan-8 Feb-8 Mar-8 Apr-8 May-8 Jun-8 Jul-8 Aug-8 From the end of March to the first half of June, the national currency depreciated and its volatility increased, although subsequently it appreciated. This reflects the impact of the monetary policy actions, a lower degree of uncertainty in the wake of the presidential elections in Mexico, and a gradual improvement in the expected outcome of NAFTA renegotiations, which was supported by the recent announcements of a preliminary agreement for the modernization of the trade treaty with the U.S. Nominal Exchange Rate / Pesos per USD Analysts Expectation Banxico 9. Analysts Expectation Citibanamex 9.7 Analysts Expectation 9 Banxico 9. Analysts Expectation 9 Citibanamex 9.7 Depreciation 9 Implied Volatility in FX Options % 8 Months 9 Months Months Month 8 Exchange Rate (as of August 8 th ) 8.9 August 8 7 Week August 8 / Observed exchange rate refers to the daily FIX Exchange Rate. Numbers in front of the analysts expectations correspond to the averages in the Banco de México survey for July and the Citibanamex survey for August st,. Source: Banco de México. Source: Bloomberg. Quarterly Report April - June 8

30 Interest rates in Mexico increased moderately for all terms. Short-term rates reflected the increase in the target for the Overnight Interbank Interest Rate in June, while longer-term rates were affected by higher external interest rates. Nov- Jan- Mar- May- Jul- Sep- Nov- Jan-7 Mar-7 May-7 Jul-7 Sep-7 Nov-7 Jan-8 Mar-8 May-8 Jul-8 Year Interest Rates % Year 9 8 Aug 8 th, Mar 8 th, Yield Curve % Day 7 Dec 9 th, 7 Sep 9 th, Month Year Dec st,..... August Day Months Years.. Source: Proveedor Integral de Precios (PiP). Source: Proveedor Integral de Precios (PiP). Quarterly Report April - June 9

31 In a context of a lower appetite for risk, Mexico-U.S. interest rate spreads for medium and long terms increased. Meanwhile, shorter-term spreads remained practically unchanged, although at high levels. In this juncture, government securities holdings by foreign investors remained stable. Aug- Oct- Dec- Feb-7 Apr-7 Jun-7 Aug-7 Oct-7 Dec-7 Feb-8 Apr-8 Jun-8 Aug-8 7 Mexico and United States Interest Rate Spreads Curve / Percentage points Volatility-adjusted -month Interest Rate Spread for Selected Emerging Countries / Index Government Securities Holdings by Foreign Investors MXN billion Day Dec st, Months Dec 9 th, 7 Mar 8 th, Aug 8 th, Sep 9 th, 7 Years / The United States objective rate is the average of the interval considered by the Federal Reserve. Source: Proveedor Integral de Precios (PiP) and U.S. Treasury Department Emerging Economies Average Mexico Range August / The selected countries are Brazil, Chile, Colombia, Turkey, South Africa, South Korea and Poland. Source: Bloomberg Total / Bonds CETES / The total includes CETES, bonds, udibonos, bondes and bondes D. Source: Banco de México. August Quarterly Report April - June,,,, 8

32 Outline External Conditions Evolution of the Mexican Economy Inflation Monetary Policy Forecasts and Final Remarks Quarterly Report April - June

33 Economic Activity Outlook GDP Growth (%) Report Jan-Mar Apr-Jun Observed Fan Chart: GDP Growth Annual percent, s. a. Central Scenario Previous Report Central Scenario Current Report Q 9 Q Increase in the Number of IMSS-insured Jobs (Thousands) Report Jan-Mar Apr-Jun Current Account Deficit (% of GDP) Report Jan-Mar Apr-Jun Q Q Q Q Q Q Q Q Q Q Q Q Q Q 7 9 s. a. / Seasonally adjusted data. Source: INEGI and Banco de México. - Quarterly Report April - June

34 Medium and long terms Forecast horizon Risks to Growth Outlook The balance of risks to the economic growth of Mexico is biased to the downside. Upward: That the recent announcements of a preliminary agreement for the modernization of the trade treaty with the U.S. lead to a recovery in investment. That the greater-than-anticipated dynamism of the U.S. industrial production favors Mexican exports. That a greater-than-expected public spending is registered. Downward: That the escalation of protectionist measures affects global growth and trade negatively. That bouts of volatility in international financial markets are observed. That the environment of uncertainty that has been affecting investment persists. That persistently weak investment has a more marked effect on Mexico s productive capacity and the rate at which new technologies are adopted. That the global protectionist measures negatively affect global value chains. That the competitiveness of the Mexican economy is affected by a number of external and domestic factors. That public safety issues, corruption, impunity and the lack of the rule of law become more pronounced. Quarterly Report April - June

35 With respect to the cyclical position of the economy, based on the estimated output trajectory, tight conditions are expected to continue relaxing. Output Gap Estimate % of potential output, s. a. Fan Charts Output Gap Estimate Excluding the Oil Sector % of potential output, s. a. Quarterly Slack Index Q 9 Q Q 9 Q Q Observed Central Scenario Previous Report Central Scenario Current Report Q Q Q Q Q Q Q Q Q Q Q Q Q Q 7 9 s. a. / Elaborated with seasonally adjusted data. Source: Banco de México Observed Central Scenario Previous Report Central Scenario Current Report Q Q Q Q Q Q Q Q Q Q Q Q Q Q 7 9 s. a. / Elaborated with seasonally adjusted data. Source: Banco de México Central Scenario Current Report Central Scenario Previous Report Q Q Q Q Q Q Q Q Q Q Q Q Q Q 7 9 Note: The dynamics expected for this indicator is consistent with the forecasts for the output that excludes the oil sector. It is not feasible to calculate a fan chart for because of the nature with which the forecast was constructed. Source: Banco de México Quarterly Report April - June

36 Inflation Outlook The inflation forecast considers that the higher-than-anticipated increases in energy prices, in a context in which non-core inflation was already at high levels, will affect the expected trajectory of annual headline inflation for 9, although this effect is forecast to be transitory. Thus, it is projected that the trajectory of convergence of headline inflation to its target will be delayed, essentially, due to the evolution of non-core inflation. Core inflation better reflects the monetary stance and therefore, in this juncture, the Governing Board will monitor it especially closely. It is estimated that annual core inflation will continue to decline, reflecting both the monetary stance and the expected easing of the cyclical conditions of the economy. Quarterly Report April - June

37 Headline inflation is forecast to approach the % target during the rest of and in 9, and starting from the first half of it will be positioned close to the target. This upward adjustment is attributed to a greaterthan-expected contribution of energy products Observed Inflation Central Scenario Previous Report Central Scenario Current Report Headline Inflation Target Fan Chart / 9 Q Q Q Q Q Q Q Q Q Current.* Previous Annual Headline Inflation Forecasts % Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q 7 9 / Quarterly average of annual inflation. The next four and six quarters are indicated as of the third quarter of, that is, the third quarter of 9 and the first quarter of, periods in which the monetary policy transmission channels fully operate. */ Observed. Source: Banco de México and INEGI. QR Next QR Box Plot. Note: Box plots are presented to illustrate both the central tendency and the range in which headline inflation could be located. The diagram is composed of a box that is determined by the interquartile range, which contains the intermediate % of the distribution, and two arms determined by. times the size of this range. The median, which corresponds to the value of the forecast, is located in the center of the box as the measure of central tendency, whereas the interquartile range represents the measure of dispersion. Source: Banco de México. Quarterly Report April - June.... Q Q Q Q Q Q Q Q 9 Differences in Contributions to the Forecast of Headline Annual Inflation (Current vs Previous Report) Merchandise Services Q Q Q Q Q Q Q 9 Source: Banco de México. Energy Agriculture Government Approved Fares Headline Inflation

38 Core inflation is expected to continue subsiding, reflecting both the monetary stance and the projected easing of the cyclical conditions of the economy. It is also expected to reach a level of % in Q Observed Inflation Central Scenario Previous Report Central Scenario Current Report Headline Inflation Target Fan Chart / 9 Q Q Q Q Q Q Q Q Q Current.7* Previous Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q 7 9 / Quarterly average of annual inflation. The next four and six quarters are indicated as of the third quarter of, that is, the third quarter of 9 and the first quarter of, periods in which the monetary policy transmission channels fully operate. */ Observed. Source: Banco de México and INEGI. Annual Core Inflation Forecasts % QR Next QR Box Plot Q Q Q Q Q Q Q Q 9 Note: Box plots are presented to illustrate both the central tendency and the range in which core inflation could be located. The diagram is composed of a box that is determined by the interquartile range, which contains the intermediate % of the distribution, and two arms determined by. times the size of this range. The median, which corresponds to the value of the forecast, is located in the center of the box as the measure of central tendency, whereas the interquartile range represents the measure of dispersion. Source: Banco de México. Quarterly Report April - June 7

39 Long term Forecast horizon Risks to Inflation Outlook The balance of risks is still biased upwards, in an environment characterized by a high degree of uncertainty. Upward That the national currency is pressured by an environment of higher external interest rates and the U.S. dollar s strength, as well as by uncertainty in both the external and domestic environment. That further increments in some energy prices and in the prices of agricultural products are observed. As a result, non-core inflation would hinder the convergence of inflation to the target. That the U.S. trade actions lead to the escalation of protectionist and compensatory measures at the global level, which would negatively affect inflation. That the greater-than-anticipated public spending lowers the pace at which core inflation is subsiding. Insofar as wage negotiations are not congruent with productivity gains, they could lead to cost pressures in the economy. Downward An appreciation of the Mexican peso in case the outcome of the recent announcement of a preliminary agreement for the modernization of the trade treaty with the U.S. is favorable. Upward That the real exchange rate shows a greater tendency towards depreciation. That a situation of structurally weak public finances is presented. That investment weakens further and low growth of productivity is accentuated, which, in view of the expansion of certain aggregate demand components, would make it more difficult to reduce inflation. Quarterly Report April - June 8

40 Final Remarks It is key to confirm the commitment to maintain a solid macroeconomic framework as a foundation for an economic policy that fuels the growth of the Mexican economy. It is important to acknowledge that the macroeconomic stability in itself is necessary but not sufficient to generate greater economic growth. It is also necessary to face structural and institutional challenges that could boost productivity, keeping in mind that, ultimately, the only way to generate better-paid jobs and decrease poverty on a sustainable basis is via greater productivity. In the same vein, it is necessary to invest in projects which provide the country with the infrastructure that contributes to strengthen the domestic market and to further benefit from Mexico s export vocation across the country. It is essential to make progress in strengthening areas other than the economy, above all, those related to safety conditions and legal certainty. Quarterly Report April - June 9

41 Annex Boxes Evolution of Financial Volatility in Turkey. Analysis of Investment Determinants. Analysis of Inflation Dynamics using Wavelets. Main Elements of the CPI Base Change. Inflation-Targeting Regime Based on Forecasts. Quarterly Report April - June

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