Inflation Report. July September 2012

Transcription

1 July September 1 November 7, 1 1

2 Outline 1 External Conditions Economic Activity in Mexico 3 Monetary Policy and Inflation Determinants Forecasts and Balance of Risks

3 External Conditions The growth rate of the world economy kept losing its dynamism: In the U.S., economic growth remained moderate. In the Euro Zone, economic activity is expected to have contracted further. In emerging countries, economic growth continued decelerating. In an environment characterized by weak growth of the world economic activity and lower commodity prices, the following is anticipated in most economies: Inflation is expected to moderate by the end of 1 and in 13. Further monetary policy easing is anticipated. 3

4 Jan-8 Aug-8 Mar-9 Oct-9 May-1 Dec-1 Jul-11 Feb-1 Sep-1 Jan- Oct- Jul-1 Apr- Jan-3 Oct-3 Jul- Apr-5 Jan-6 Oct-6 Jul-7 Apr-8 Jan-9 Oct-9 Jul-1 Apr-11 Jan-1 Oct-1 In the U.S., industrial production has lost dynamism and employment recovery has not consolidated. U.S.: Industrial and Manufacturing Production Index Jan-7=1; s.a. U.S.: Unemployment Rate and Employment-Population Ratio %; s.a Industrial Production Manufacturing Production Unemployment rate Employment-population ratio (left axis) 8 5 s.a./ Seasonally adjusted. Source: U.S. Federal Reserve. s.a./ Seasonally adjusted. Source: Bureau of Labor Statistics (BLS).

5 Jan-7 Nov-7 Sep-8 Jul-9 May-1 Mar-11 Jan-1 Aug Jan-7 Nov-7 Sep-8 Jul-9 May-1 Mar-11 Jan-1 Sep-1 In the Euro zone, fiscal and credit adjustments continued negatively affecting economic activity. Euro Zone: Industrial Production Index Jan-7=1; s.a. Euro Zone Italy Spain France Greece Portugal Germany Euro Zone: Public Balance % of GDP Forecast - Euro Zone: Credit of Financial Institutions to Private Sector Annual % change Greece Italy Portugal Spain Germany France Mexico 1/ s.a./ Seasonally adjusted. Source: Eurostat. 1/ Public Balance without Pemex investment. Source: Fiscal Monitor (IMF) and Mexico s Ministry of Finance (SHCP). Source: European Central Bank. 5

6 Jan-1 Jun-1 Nov-1 Apr-11 Sep-11 Feb-1 Jul-1 Nov-1 Jan-1 Jun-1 Nov-1 Apr-11 Sep-11 Feb-1 Jul-1 Nov-1 Measures announced by financial authorities in main advanced economies contributed to improved conditions in international financial markets. Germany Spain France Italy Portugal Mexico Credit Default Swaps 1/ Basis points 6-Sep-1 1,6 1, 1, 1, 8 3-month Libor-OIS and Euribor-EONIA Spread / Spread in basis points U.S. Euro Zone 6-Sep / 5-year CDS. On September 6, the European Central Bank announced its new program of sovereign bond buying. Source: Bloomberg. / For United States it refers to the 3-month Libor-OIS spread, and for the euro area it refers to the 3-month Euribor-EONIA spread. On September 6, the European Central Bank announced its new program of sovereign bond buying. Source: Bloomberg. 6

7 Improved international financial conditions contributed to a rebound in capital flows towards emerging markets. Jan-8 Jun-8 Nov-8 Apr-9 Sep-9 Feb-1 Jul-1 Dec-1 May-11 Oct-11 Mar-1 Aug-1 Nov-1 Emerging Economies: Accumulated Capital Flows (Debt and Equity) Billions of dollars Emerging Economies: Exchange Rate 1/ Index 1-Jan-8=1 Brazil Chile Colombia Korea Mexico Depreciation against USD 6-Sep Weeks Source: Emerging Portfolio Fund Research. 1/ On September 6, the European Central Bank announced its new program of sovereign bond buying. Source: Bloomberg. 7

8 Jan- Dec- Nov-1 Oct- Sep-3 Aug- Jul-5 Jun-6 May-7 Apr-8 Mar-9 Feb-1 Jan-11 Dec-11 Nov-1 Jan- Dec- Nov-1 Oct- Sep-3 Aug- Jul-5 Jun-6 May-7 Apr-8 Mar-9 Feb-1 Jan-11 Dec-11 Nov-1 The deterioration of global growth prospects, together with better production outlook, suggest lower commodity prices. Brent WTI International Price of Crude Oil Dollars per barrel Corn International Price of Grains Dollars per bushel Wheat Source: Bloomberg. Source: Bloomberg. 8

9 Inflation in 1 and 13 is expected to be lower than in 11 in most countries World Inflation % 1 World Forecast 9 Advanced Emerging Source: International Monetary Fund. 9

10 Outline 1 External Conditions Economic Activity in Mexico 3 Monetary Policy and Inflation Determinants Forecasts and Balance of Risks 1

11 During the third quarter of 1 economic activity in Mexico kept expanding, although it started showing signs of slowdown. Jan-7 Aug-7 Mar-8 Oct-8 May-9 Dec-9 Jul-1 Feb-11 Sep-11 Apr-1 Aug-1 Jan-7 May-7 Sep-7 Jan-8 May-8 Sep-8 Jan-9 May-9 Sep-9 Jan-1 May-1 Sep-1 Jan-11 May-11 Sep-11 Jan-1 May-1 Sep Global Indicator of Economic Activity (IGAE) Index 3=1; s.a. Total Industrial Services Agricultural (left axis) Total Manufacturing Exports by Region of Destination Index 7=1; s.a. U.S. Others s.a./ Seasonally adjusted and trend data. Source: INEGI. s.a./ Seasonally adjusted and trend data. Source: Banco de México. 11

12 Jan-7 Private consumption exhibited a growing trend, even when some of its determinants slowed down. Nov-7 Sep-8 Jul-9 May-1 Mar-11 Jan-1 Aug-1 Jan-7 Aug-7 Mar-8 Oct-8 May-9 Dec-9 Jul-1 Feb-11 Sep-11 Apr-1 Oct-1 Jan-8 Sep-8 May-9 Jan-1 Sep-1 May-11 Jan-1 Sep-1 Commercial Establishments Retail Sales Index 3=1; s.a. Consumer Confidence Index Jan-3=1; s.a. Commercial Banks Performing Credit for Consumption Real annual % change Total Credit cards Durable goods 1/ Payroll and others / s.a./ Seasonally adjusted data. Source: INEGI. s.a./ Seasonally adjusted data. Source: INEGI and Banco de México. 1/ Includes credit for the acquisition of property and automobile credits. / Others refers to personal credits, credit for payable leasing operations and other consumption credits. Source: Banco de México. 1

13 Jan-7 Gross fixed investment presented slower growth in the third quarter of 1. Dec-7 Nov-8 Oct-9 Sep-1 Aug-11 Jul-1 Jan-7 Oct-7 Jul-8 Apr-9 Jan-1 Oct-1 Jul-11 Apr-1 Oct-1 Jan-7 Nov-7 Sep-8 Jul-9 May-1 Mar-11 Jan-1 Investment and its Components Index 5=1; s.a. Total Machinery and equipment Construction Producer Confidence Index 5 points reference; s.a Domestic Financing to Non- Financial Private Firms Real annual % change Total Credit Issuance Sep-1-15 s.a./ Seasonally adjusted. Source: INEGI. s.a./ Seasonally adjusted data. Source: INEGI and Banco de México. Source: Banco de México. 13

14 Outline 1 External Conditions Economic Activity in Mexico 3 Monetary Policy and Inflation Determinants Forecasts and Balance of Risks 1

15 Monetary Policy and Inflation Determinants In recent months monetary policy faced a difficult situation, characterized by the following factors: Weakening of external demand started to affect economic activity, with the possible impact on inflation in Mexico. A series of supply-related shocks led to a rebound in inflation, which, although expected to be temporary, has been persistent and of considerable magnitude. After balancing the referred risks, the Board of Governors decided to maintain the Overnight Interbank Interest Rate at.5 percent, although it has repeatedly expressed concern regarding the evolution of inflation determinants. 15

16 Monetary Policy and Inflation Determinants During the third quarter of 1, average annual headline inflation increased and exceeded the upper bound of the variability interval around the established target. This evolution is mainly accounted for by increases in agricultural products prices. Four products with the highest incidence on inflation stand out: egg, chicken, beef and tomato. Keeping in mind the transitory character of shocks affecting inflation, the referred increase is estimated to be temporary, although these shocks persistence has become a reason for concern. 16

17 Higher annual headline inflation is mainly explained by the increase in some food prices. Jan-7 May-7 Sep-7 Jan-8 May-8 Sep-8 Jan-9 May-9 Sep-9 Jan-1 May-1 Sep-1 Jan-11 May-11 Sep-11 Jan-1 May-1 Sep-1 Consumer Price Index Annual % change 1 CPI Core Non-core Source: Banco de México and INEGI. 17

18 Jan-7 Nov-7 Sep-8 Jul-9 May-1 Mar-11 Jan-1 Sep-1 Jan-7 Nov-7 Sep-8 Jul-9 May-1 Mar-11 Jan-1 Sep-1 Jan-7 Nov-7 Sep-8 Jul-9 May-1 Mar-11 Jan-1 Sep-1 The behavior of annual core inflation has been the consequence of an adjustment in some products relative prices, rather than generalized price increases in the economy. Subindices of Core Merchandise Prices Annual % change Subindices of Core Services Prices Annual % change Services Housing Education (tuition) Other services CPI CPI Excluding Food and Energy 1/ Annual % change CPI excluding food and energy Merchandise Food, beverages and tobacco Non-food merchandise Source: Banco de México and INEGI. Source: Banco de México and INEGI. 1/ Excluding food at home (raw and processed foods and non-alcoholic beverages), food outside home, and energy. Source: Banco de México and INEGI. 18

19 Jan-7 Aug-7 Mar-8 Oct-8 May-9 Dec-9 Jul-1 Feb-11 Sep-11 Apr-1 Sep-1 Jan-7 Aug-7 Mar-8 Oct-8 May-9 Dec-9 Jul-1 Feb-11 Sep-11 Apr-1 Sep-1 Non-core inflation increased due to the performance of agricultural products prices, driven by climatic and sanitary conditions. Non-core Inflation and Components Annual % change Subindex of Livestock Products Prices Annual % change Non-core Agricultural Energy and government approved fares 15 Eggs Beef Chicken Source: Banco de México and INEGI. Source: Banco de México and INEGI. 19

20 The output gap has remained around zero. Output Gap 1/ % of potential output; s.a Aug-1-1 Jan- Jun- Nov- Apr-5 Sep-5 Feb-6 Jul-6 Dec-6 May-7 Oct-7 Mar-8 Aug-8 Jan-9 Jun-9 Nov-9 Apr-1 Sep-1 Feb-11 Jul-11 Dec-11 May-1 8 GDP / IGAE / s.a./ Calculated with seasonally adjusted data. 1/ Estimated using the Hodrick-Prescott (HP) filter with tail correction method; see Banco de México (9), April June 9, p.69. The shaded area is the 95% confidence interval of the output gap, calculated with an unobserved components method. / GDP figures up to the second quarter of 1; IGAE up to August 1. Source: Calculated by Banco de México with data from INEGI.

21 Jan-7 Aug-7 Mar-8 Oct-8 May-9 Dec-9 Jul-1 Feb-11 Sep-11 Apr-1 Sep-1 Jan-5 Sep-5 May-6 Jan-7 Sep-7 May-8 Jan-9 Sep-9 May-1 Jan-11 Sep-11 May-1 Sep-1 Diverse labor market indicators kept recovering. Original IMSS-insured Workers 1/ Million workers Seasonally adjusted National Unemployment Rate %; s.a / Permanent and temporary workers in urban areas. Source: IMSS and seasonally adjusted by Banco de México s.a./ Seasonally adjusted. Source: National Employment Survey (Encuesta Nacional de Ocupación y Empleo), INEGI. 1

22 I 8 II III IV I 9 II III IV I 1 II III IV I 11 II III IV I 1 II III Although it is not a widespread phenomenon, some wage negotiations reached higher increases than those registered in the past. I 8 II III IV I 9 II III IV I 1 II III IV I 11 II III IV I 1 II III IMSS Reference Wage 1/ Annual % change 8 Total Contractual Wage / Annual % change 8 7 Public firms Private firms / The IMSS reference wage (Salario base de cotización, SBC) considers the daily average earnings of IMSS-insured workers during a certain period and some fringe benefits (e.g., end-of-year bonuses, vacation bonuses and commissions). Source: Calculated by Banco de México with data from IMSS and STPS. / The number of workers in firms under federal jurisdiction that annually report their wage increases to the Secretary of Labor and Social Welfare (Secretaría del Trabajo y Previsión Social) equals approximately million. Source: Calculated by Banco de México with data from IMSS and STPS.

23 Jan-1 Apr-1 Jul-1 Oct-1 Jan-11 Apr-11 Jul-11 Oct-11 Jan-1 Apr-1 Jul-1 Oct-1 Jan-1 Apr-1 Jul-1 Oct-1 Jan-11 Apr-11 Jul-11 Oct-11 Jan-1 Apr-1 Jul-1 Oct-1 Jan-5 Mar-6 May-7 Jul-8 Sep-9 Nov-1 Jan-1 Nov-1 Medium- and long-term inflation expectations remained stable. Inflation Expectations for the End of 1 % Headline Core Non-core Headline Inflation Expectations % Break-even Inflation and Inflationary Risk 1/ % 1-year bond break-even inflation -day moving average End 13 Next years Next 5-8 years Variability interval Source: Banco de México s survey. Source: Banco de México s survey. 1/ The break-even inflation and inflationary risk implicit in 1- year bonds is calculated based on nominal and real interest rates of the secondary market. Source: Banco de México estimate with data from Valmer. 3

24 Mar-8 Jul-8 Nov-8 Mar-9 Jul-9 Nov-9 Mar-1 Jul-1 Nov-1 Mar-11 Jul-11 Nov-11 Mar-1 Jul-1 Nov-1 Jan-8 Jun-8 Nov-8 Apr-9 Sep-9 Feb-1 Jul-1 Dec-1 May-11 Oct-11 Mar-1 Aug-1 Oct-1 The national currency registered an appreciation trend in the reference period and securities holdings by foreign investors kept rising. Exchange Rate and its Expectations for the End of 1 and 13 1/ Pesos per dollar Observed Expectations End 1 Expectations End Government Securities Holdings by Foreign Investors Billions of pesos Bonds CETES 1, / The observed exchange rate is the daily FIX exchange rate. The latest data for the observed exchange rate is November 5, 1 and the foreign exchange rate forecasts is November 5, 1. Source: Banco de México and Banamex survey. Source: Banco de México.

25 Jul-7 The aforementioned, together with stable longer-term inflation expectations, caused domestic interest rates to remain stable as well. Mar-8 Nov-8 Jul-9 Mar-1 Nov-1 Jul-11 Mar-1 Nov-1 Interest Rates of Government Securities 1/ % Mexico s Yield Curve % day 3 month 1 year 1 year 3 year Dec-11 9-Mar-1 9-Jun-1 5-Nov day months years 1/ Since January 1, 8, the one-day (overnight) interest rate corresponds to the target for the Overnight Interbank Interest Rate. Source: Banco de México and Proveedor Integral de Precios (PiP). Source: Banco de México and Proveedor Integral de Precios (PiP). 5

26 Monetary Policy and Inflation Determinants So far, the evolution of different inflation determinants suggests the following: i. That the above referred supply shocks, even when they have been successive, have not contaminated so far the price formation process of the economy. ii. That there is no evidence indicating aggregate demand-related pressures on inflation. iii.some wage increases higher than in previous months have been observed, albeit mainly in the public sector. However, in this context: With inflation at high levels during various months due to the persistence of shocks, With the output gap around zero, The risk of the price formation process being contaminated cannot be ruled out. 6

27 Outline 1 External Conditions Economic Activity in Mexico 3 Monetary Policy and Inflation Determinants Forecasts and Balance of Risks 7

28 Forecasts for the Mexican Economy: GDP growth: Increase in the number of IMSS-insured Between 3.5 and.% in 1. workers: Between 3. and.% in 13. Between 6 and 7 thousand in 1. Between 5 and 6 thousand in s.a./ Seasonally adjusted. Source: INEGI and Banco de México Fan Chart: GDP Growth Annual %; s.a. 11 Q 1 Q 13 Q Q Q Q Q Q Q Q Q Q Q Q Q Fan Chart: Output Gap 1/ % 1/ Calculated with seasonally adjusted data. Source: Banco de México. 11 Q 1 Q 13 Q Q Q Q Q Q Q Q Q Q Q Q Q

29 Balance of Risks for the Economic Activity. Downward risks have increased due to prevailing factors that could induce a more unfavorable environment for the Mexican economy: A more pronounced slowdown of the U.S. economy. An environment of increased volatility and uncertainty in international financial markets, if no progress is made in solving the fiscal and banking problems in the Euro Zone. The slowdown of emerging economies, like Brazil, China and India, could intensify, further affecting global demand. As opposed to the risks mentioned before, the growth scenario for Mexico could be favorably affected by the approval and implementation of structural reforms that strengthen domestic sources of growth. 9

30 Inflation Forecasts Headline inflation is anticipated to have changed its trend in September and the following elements are expected to contribute to its further downward trajectory: A global environment of weak growth. Absence of considerable demand pressures on the Mexican economy, even if the degree of slackness in the labor market has decreased. Intensified competition in some sectors. Fading of the effect that some food price shocks had on inflation during 1. The MXN appreciation after the announcement of a further round of monetary easing (QE3) in the U.S. Core inflation is also expected to have changed its trend since August 1. 3

31 It is estimated that annual headline inflation will be very close to percent at the end of 1 and will locate between 3 and percent in 13. Annual Headline Inflation 1/ % Observed Inflation Headline Inflation Target Variability Interval 11 Q 1 Q Fan Charts 13 Q Annual Core Inflation / %. Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Observed Inflation Headline Inflation Target Variability Interval 11 Q 1 Q 13 Q / Quarterly average of annual headline inflation. Source: INEGI and Banco de México. / Quarterly average of annual core inflation. Source: INEGI and Banco de México. 31

32 However, upward risks to inflation have increased. In an environment where the output gap has closed, the following risks stand out: The situation prevailing in the national production of eggs. Unfavorable climatic conditions in North America that affected international grain and meat product prices. The possibility of new increases in agricultural products prices, derived from these products affected production. The possibility that prices and/or fares of public goods and services increase more than foreseen. The return of volatility in international financial markets that cannot be ruled out. Derived from the fact that inflation has remained at high levels during various months: The risk of observing a contamination of the wage setting process in the economy. The risk that the elevation of inflation above the upper bound of the variability interval around the 3 percent target is a topic that received more public attention. 3

33 Monetary Policy Stance Considering the aforementioned, the Board of Governors estimates that if inflation shocks persist, even if presumed as transitory, and the changes in the trend of headline and core inflation are not confirmed, it would be appropriate to adjust upwards the reference rate in the near future, in order to: Consolidate the anchor of inflation expectations. Prevent the contamination of the rest of the price formation process in the national economy. Avoid jeopardizing the convergence of inflation to the 3 percent permanent target. 33

34 It is necessary to strengthen domestic sources of growth. Together with the environment of macroeconomic stability reached by Mexico, necessary for its economic development, the progress in the economy s structural change could boost the country s economic growth, especially in the medium and long run. These reforms would also favor the maintenance of a low and stable inflation environment. Indeed, rising productivity would allow reaching higher aggregate demand growth rates without generating pressures on prices. 3

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