Mexico Economic Outlook 3Q18 August 2018
Key messages Global growth continues, but risks are intensifying. The economy grew 2.1% in the first half of the year. Downward bias in our growth forecast for 2018; no change for 2019 Inflation will be slightly above 4.0% at the end of the year; we do not expect additional interest rate adjustments for the rest of the year. Slight deterioration of fiscal and external accounts in the first half of 2018. Trade tensions are the main factor behind the changes in financial variables. The main short-term risk is a possible 25% tariff on automobiles
01 International context Mexico Economic Outlook 3Q18 / 3
Mexico Economic Outlook 3Q18 / 4 Global growth continues, but risks are intensifying 01 The pace of global expansion is being maintained, but is less synchronised Growth is strong in the US due to the fiscal stimulus and stable in China, but is declining in Europe 04 Monetary standardisation at different rates between the Fed and the ECB Strengthening of the dollar and tightening of global financial conditions 02 Increased protectionism Its impact on growth is limited for the time being, but it could be greater if the measures under discussion were to be implemented 05 More volatility in emerging markets Increased tensions over the rising cost of financing and the threats of the trade war 03 Increase in the price of oil Higher inflation and drag on growth in oil-importing countries 06 Global risks are intensifying With a trade war come greater risks in emerging economies and in Europe
Mexico Economic Outlook 3Q18 / 5 Robust global economy despite growing uncertainty World GDP growth (Forecasts based on BBVA-GAIN, % QoQ) Global growth continues, supported by private consumption and investment, but with growing differences by region World trade remains strong despite losing some momentum after the strength displayed earlier this year, and does not yet reflect increased protectionism Confidence indicators show some moderation, but remain at high levels Source: BBVA Research
Mexico Economic Outlook 3Q18 / 6 The tariff measures approved have a limited effect, one that would be much greater if they included those being discussed (autos) Effect on GDP growth of US tariff increases and the response by other countries (2018-19, pp) The tariff increases approved by the US 0.00 would have a limited direct impact. But -0.05 the indirect effects, via economic confidence and financial channel, could -0.10 be felt in 2H18-0.15-0.20-0.25-0.30-0.35-0.40 With escalating protectionism, the negative effect on growth would be significant in the US. The growth of global GDP could be reduced by around 0.2 pp through the trade channel alone -0.45 Current measures Measures under discussion World US China Eurozone Measures announced: tariff increase to 25% on steel, 10% on aluminium and 25% on Chinese imports for a value of US$50 billion Measures under discussion: tariff increases up to 20% on cars and Chinese imports for a value of US$200 billion Source: BBVA Research
Mexico Economic Outlook 3Q18 / 7 The rise in oil prices will push inflation upwards and could weigh down growth Upward revision of the price of oil and inflation (%) 10 8 6 4 2 0 The increase is due to reduced supply, and the price will remain relatively stable in 2018 and 2019 In the US, the increase in oil prices will not prompt a significant increase in inflation. The exit strategy of the Fed and the ECB is reinforced -2 2018 2019 Brent Abr'18 Jul'18 Source: BBVA Research
Mexico Economic Outlook 3Q18 / 8 The strength of the US dollar and higher interest rates are causing an adjustment in emerging markets, an effect which is greater in the most vulnerable ones EUR-USD exchange rate and BBVA index of financial tensions in emerging markets The most vulnerable countries are those with the greatest trade deficits and thus the greatest need of external financing Shift towards a tightening of monetary policy in emerging countries to avoid further depreciation of their currencies The increase in financial tensions also reflects the intensification of the trade dispute Source: BBVA Research based on Bloomberg
Mexico Economic Outlook 3Q18 / 9 Protectionism and political factors lead to a growing risk aversion Risk appetite/aversion indicator Investor sentiment has shifted from risk-taking mode (and even a certain complacency) to one of risk aversion The change is prompting a rotation of flows between assets: from emerging markets to developed ones, and from equities to bonds Trade tensions, with a focus on China, but threats on several fronts, can lead to a flight to quality Source: BBVA Research
Mexico Economic Outlook 3Q18 / 10 U.S. supported by fiscal stimulus, but approaching the end of the expansionary cycle USA: GDP growth (% YoY) Growth has accelerated in the first half of the year, boosted by the fiscal stimulus and the improvement in the labour market Trade tensions could weigh on production and global demand The absorption of the idle capacity of the economy foreshadows the end of the expansive phase of the cycle Inflation will temporarily exceed the Fed s target due to the higher energy prices, but inflation expectations remain anchored (f) Forecast Source: BBVA Research based on BEA (Bureau of Economic Analysis) figures
Short-term probability Mexico Economic Outlook 3Q18 / 11 Global risks: The main one is a trade war, but risks associated with emerging economies and Europe are also on the rise CHINA High indebtedness: more contained but still high Protectionism: upwards (retaliation) with possible impact on domestic policies (financial stability, reforms) USA USA EZ CHINA Protectionism: upwards The Fed exit strategy: high. Aggressive interest rate hikes in the face of a temporary increase in inflation Signs of over-valuation of certain financial assets EURO ZONE EM Political uncertainty: on the upswing, led by Italy. Brexit: risk of nodeal Protectionism: on the upside, with a focus on the auto sector Exit strategy by the ECB: on the downside (delay of rate hikes) EMERGING ECONOMIES Severity Upward. Global risks and domestic vulnerabilities in some countries are raising the risk of a systemic crisis Source: BBVA Research
02 The economy grew 2.1% in the first half of the year. Mexico Economic Outlook 3Q18 / 12
Mexico Economic Outlook 3Q18 / 13 Mixed performance in 1H18: 1.1% growth in 1Q18 and -0.1% in 2Q18. Deterioration in the primary sector and industry; slowing growth in the tertiary sector. GDP (% QoQ, sa) Components of GDP Supply (% QoQ, sa) 0.9 1.1 0.9 0.9 1.1 0.3 0.4 0.3-0.3 0.0-0.1 2017/01 2017/02 2017/03 2017/04 2018/01 2018/02-2.1 Primary sector Industry Commerce and services 1T18 2T18 Source: BBVA Research / INEGI (National Statistics Institute)
2010/01 2010/05 2010/09 2011/01 2011/05 2011/09 2012/01 2012/05 2012/09 2013/01 2013/05 2013/09 2014/01 2014/05 2014/09 2015/01 2015/05 2015/09 2016/01 2016/05 2016/09 2017/01 2017/05 2017/09 2018/01 2018/05 2017/01 2017/02 2017/03 2017/04 2017/05 2017/06 2017/07 2017/08 2017/09 2017/10 2017/11 2017/12 2018/01 2018/02 2018/03 2018/04 2018/05 Mexico Economic Outlook 3Q18 / 14 2Q18: agricultural production affected by intense heat waves and slowdown in construction, extractive industries and automotive sectors Industry activity indicator (% MoM, sa) 115 110 105 100 95 90 85 80 Manufacturing production (Year-on-year growth rate %, 6-month moving average, sa) 14 12 10 8 6 4 2 0-2 -4-6 -8 Construction Edification Civil engineering works Specialized works for construction Mexico U.S. Source: BBVA Research / INEGI (National Statistics Institute)
2017/01 2017/02 2017/03 2017/04 2017/05 2017/06 2017/07 2017/08 2017/09 2017/10 2017/11 2017/12 2018/01 2018/02 2018/03 2018/04 2018/05 2018/06 2017/01 2017/02 2017/03 2017/04 2017/05 2017/06 2017/07 2017/08 2017/09 2017/10 2017/11 2017/12 2018/01 2018/02 2018/03 2018/04 2018/05 2018/06 Mexico Economic Outlook 3Q18 / 15 2Q18: exports show deterioration especially in extractive industries and the auto sector; possible deterioration in U.S. manufacturing production. Exports from Mexico (Index base 2017/01 = 100) 170 160 150 140 130 120 110 100 Manufacturing production. USA (Year-on-year growth rate, 6 month moving average) 2.5 2.0 1.5 1.0 0.5 90 0.0-0.5 Non-oil exports Extractive industries Rest of manufacture Agricultural Automotive Source: BBVA Research / INEGI (National Statistics Institute)
Mexico Economic Outlook 3Q18 / 16 Downward bias in our growth forecast for 2018; no change for 2019 GDP. (YoY %, sa) 2.3 2.6 2.0 2017 2018 2019 Source: BBVA Research / INEGI (National Statistics Institute)
03 Slight deterioration in fiscal and external accounts in 1H18 Mexico Economic Outlook 3Q18 / 17
Total Tax income Non-tax income Entities and firms of budgetary control Productive firms of the State Oil income Non-oil income Mexico Economic Outlook 3Q18 / 18 Total public sector budget revenue showed a real annual decrease of 10.3% in the first half of 2018 Public sector budget revenues and components in 1H18 (real chg. % YoY) 20 10 0-10 -20-30 -40-50 -10.3 1.1-46.7 4.5 3.3 8.7-13.8 Stripping out Bank of Mexico Operating Surplus from the year-on-year comparison, total public revenues would have registered a real increase of 2.1% in 1H18 Oil revenues reported real annual growth of 8.7% in 1Q18 VAT contributed 2.7 percentage points to the real annual variation in tax revenues in 1H18, but was offset by the negative contribution of gasoline and diesel tax of 2.1 percentage points. Source: BBVA Research and Ministry of Finance
Total Programmable spending Current spending Capital expenditure Non-programmable spending Revenue sharing Financial cost Mexico Economic Outlook 3Q18 / 19 Total net spending showed a real annual increase of 4.9% in the first half of 2018; we expect a significant contraction in the second half of the year Public sector net expenditure and components in 1H18* (real chg. % YoY) 20 15 10 5 0-5 -10-15 -20 4.9 2.5 7.0-14.8 11.2 1.2 13.1 Total spending in 1H18 was mainly driven by non-programmable spending, which contributed 3.2 percentage points to total expenditure growth Current expenditure showed a real annual increase of 7.0% in 1H18 The Adefas contributed 5.4 percentage points to the growth in non-programmable spending of 11.2% in 1H18 The Adefas showed a real annual increase of 158.5% in 1H18 and accounted for 7.9% within non-programmable expenditure. Source: BBVA Research and Ministry of Finance
Net total spending w/o fin. investment w/o fin. investment and rev. shar. w/o fin. investment, rev. shar. and pens. w/o fin. investment, rev. shar., pens. and fin. cost Mexico Economic Outlook 3Q18 / 20 The federal government reduced its commitment to fiscal consolidation in the first half of 2018 Public spending indicators in 1H18 (real chg. % YoY) 12 10 8 6 4 2 0 4.9 8.1 9.5 10.2 9.6 Stripping out financial investment, revenue sharing, public pensions and financial costs, the real annual increase in spending would be 9.6% in 1H18 This limited concept of expenditure shows that the federal government reduced its fiscal consolidation efforts in 1H18 Source: BBVA Research and Ministry of Finance
2018 target for primary balance Primary balance Federal government Entities and firms Entities under indirect control Mexico Economic Outlook 3Q18 / 21 The federal government will have to ramp up its fiscal consolidation efforts to reach the primary surplus target of 0.8% of GDP in 2018 Primary balance and components at 1H18 (Billions of pesos) 200 150 The primary surplus in 1H18 was largely due to the balance sheets of both entities under indirect budgetary control and the Mexican Institute of Social Security 100 50 0-50 The primary balance of the federal government will need to have a surplus in the July-December 2018 period to meet the target of 0.8% of GDP for the primary surplus Source: BBVA Research and Ministry of Finance
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018e Mexico Economic Outlook 3Q18 / 22 We expect government debt (% of GDP) to show a marginal decline in 2018 Historical balance of public sector borrowing requirements (% of GDP) 55 50 45 48.7 46.2 45.8 40 35 30 25 20 Source: BBVA Research and Ministry of Finance We expect fiscal consolidation efforts and MXN appreciation to be reflected in a marginal reduction of the historical balance of public sector borrowing requirements (% of GDP) from 46.2% in 2017 to 45.8% in 2018
1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18* Mexico Economic Outlook 3Q18 / 23 The trade deficit reached US$2.773 billion in the second quarter of 2018 as the deterioration in the oil balance took a toll on it Trade balance and principal components (US$ million) 6,000 4,000 The trade deficit increased to US$ 2.773 billion in 2Q18 from US$ 302 million in 2Q17 2,000 0-2,000-4,000-6,000-8,000 This is due mainly to the deterioration in the oil trade balance (with a deficit of US$5.497 billion in 2Q18 vs. US$ 3.826 billion in 2Q17) We expect the trade deficit for 2018 to be US$ 12.8 billion Manufacturing Others Oil sector Trade balance Manufacturing and other balances do not represent observed data, but own estimates. Source: BBVA Research / INEGI (National Statistics Institute)
04 Temporary rebound in inflation; monetary pause for the rest of the year Mexico Economic Outlook 3Q18 / 24
Mexico Economic Outlook 3Q18 / 25 Headline inflation: the increase during June-July will be temporary, but the pace of convergence towards the target will be slower Headline and core inflation* (YoY % change) Headline and energy inflation* (YoY % change) * The July figure is a forecast, but is based on the known data from the first half of the month. Source: BBVA Research / INEGI (National Statistics Institute) * The July figure is a forecast, but is based on the known data from the first half of the month. Source: BBVA Research / INEGI (National Statistics Institute)
Mexico Economic Outlook 3Q18 / 26 Core inflation remains on a downward trend... Core inflation and components* (YoY % change) Core inflation of goods and components* (YoY % change) Source: BBVA Research / INEGI (National Statistics Institute) Source: BBVA Research / INEGI (National Statistics Institute)
Mexico Economic Outlook 3Q18 / 27... which we anticipate will continue uninterrupted Core inflation and components* (YoY % change) Core inflation of goods and components* (YoY % change) * Own calculations based on the deseasonalisation of the core inflation index Source: BBVA Research / INEGI (National Statistics Institute) Source: BBVA Research, INEGI and Bloomberg
Mexico Economic Outlook 3Q18 / 28 Monetary policy: pause for the rest of the year Ex ante real monetary policy rate* (%) * Own calculations based on 12-month inflation expectations from the Banxico analysts survey and using our inflation expectations for projected data Source: BBVA Research / INEGI / Banxico
Mexico Economic Outlook 3Q18 / 29 In 2019 we expect a reduction of 75bp to 7.0% in the monetary policy rate Outlook for the monetary policy rate (Nominal, %) * Own calculations based on 12-month inflation expectations from the Banxico analysts survey and using our inflation expectations for projected data Source: BBVA Research / INEGI / Banxico
05 Domestic asset prices influenced by commercial tensions Mexico Economic Outlook 3Q18 / 30
Mexico Economic Outlook 3Q18 / 31 NAFTA: Bilateral negotiations between Mexico and the U.S. prompt optimism, but as yet no specific deals have been made. USA Mexico 40% of auto value (45% trucks) from high-wage regions Implementation: 4 years cars and 2 years trucks Obligation to use steel and aluminium from North America 20% of the value of the car made in high-wage regions 10 years for implementation Bonus for using steel and aluminium from North America No progress on controversial issues (e.g. sunset clause)
Mar-18 Mar-18 Mar-18 Mar-18 Mar-18 Apr-18 Apr-18 Apr-18 Apr-18 May-18 May-18 May-18 May-18 May-18 Jun-18 Jun-18 Jun-18 Jun-18 Jul-18 Jul-18 Jul-18 Jul-18 Mexico Economic Outlook 3Q18 / 32 Process of appreciation of the peso due to lower commercial tensions, not interrupted by the electoral result (already anticipated) Exchange rate (Pesos per dollar) 21.0 20.5 Tariffs on steel and aluminum AMLO's conciliatory stance and optimism regarding NAFTA have had an impact on the appreciation 20.0 Deadline to approve preliminary deal Elections 25% duty on U.S. auto imports is the main short-term risk. 19.5 19.0 Global trade tensions will continue to adversely affect emerging market currencies 18.5 18.0 17.5 Trump pushes for a preliminary NAFTA deal Source: BBVA Research and Bloomberg
Mar-18 Mar-18 Mar-18 Mar-18 Mar-18 Apr-18 Apr-18 Apr-18 Apr-18 May-18 May-18 May-18 May-18 May-18 Jun-18 Jun-18 Jun-18 Jun-18 Jul-18 Jul-18 Jul-18 Jul-18 mar-18 mar-18 mar-18 abr-18 abr-18 may-18 may-18 jun-18 jun-18 jul-18 jul-18 Mexico Economic Outlook 3Q18 / 33 Interest rates and sovereign risk also fall in light of idiosyncratic risk reduction Sovereign risk, 5-year CDS spread (Basis Points) 10-year interest rates, US and Mexico (%) 155 8.05 3.2 145 7.95 Deadline to approve preliminary deal 3.1 135 125 Tariffs on steel and aluminum Deadline to approve a preliminary deal Elections 7.85 7.75 7.65 3.0 2.9 2.8 115 7.55 Elections 2.7 105 95 Trump pushes for a preliminary NAFTA deal 7.45 7.35 7.25 Trump pushes for a preliminary NAFTA deal 2.6 2.5 2.4 Source: BBVA Research / Bloomberg M10 (LHS) T10 (RHS)
Mexico Economic Outlook 3Q18 / 34 The inflows of medium- and long-term bonds by foreigners continues despite uncertainty Change in foreigners holdings of M bonds (Millions of dollars) 20,000 18,056 Holdings of medium- and long-term bonds have increased despite uncertainty 15,000 10,000 5,000 4,483 11,363 5,547 This increase stands out among the emerging nations that have recorded outflows in recent months The pace of inflows has slowed down in the face of lower global liquidity 0-5,000 Jan Feb Mar Apr May June July Aug Sept Oct Nov Dec 2015 2016 2017 2018 Source: BBVA Research / Banxico
Key messages Global growth continues, but risks are intensifying. The economy grew 2.1% in the first half of the year. Downward bias in our growth forecast for 2018; no change for 2019 Inflation will be slightly above 4.0% at the end of the year; we do not expect additional interest rate adjustments for the rest of the year. Slight deterioration of fiscal and external accounts in the first half of 2018. Trade tensions are the main factor behind the changes in financial variables. The main short-term risk is a possible 25% tariff on automobiles
Mexico Outlook 3Q18 August 2018