Manuel Sánchez World Affairs Council of Houston Federal Reserve Bank of Dallas, Houston, Texas, November 1, 2012
Contents 1 Current economic rebound 2 Outlook 3 Inflation and monetary policy 4 Concluding remarks 2
Since the middle of 2009, Mexico has been experiencing a process of continuous economic recovery 2001-2007 2008 2009 2010 2011 1h 2012 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Gross Domestic Product yoy change, % Global Economic Activity 2003=100; s.a. 6 4 2 Total Industry Services 140 130 0-2 120-4 110-6 100 * */ Yearly average Source: INEGI s. a. / seasonally adjusted Source: INEGI 3
The current upturn has been balanced, including domestic fixed investment and consumption Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Investment 2007 = 100; s.a. 120 Retail Sales 2007 = 100; s.a. 110 115 110 106 105 100 102 95 98 90 85 94 s.a. / Seasonally and trend-adjusted Source: Mexico s National Accounts System, INEGI s.a. / Seasonally and trend-adjusted Source: Commercial establishment survey, INEGI 4
The domestic economic rebound has been possible thanks to Mexico s macroeconomic fundamentals Contained public debt with rising average maturity Relatively low inflation Well-capitalized, provisioned, and liquid banking system 5
A positive feedback loop has emerged between labor market developments, bank lending and consumer spending Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Employment and Unemployment * Million workers 16 s.a. Unemployment (right) % EAP 7 Consumer Bank Performing Loans 2007=100 115 Employment (left) 6 15 100 5 14 4 85 13 3 70 */ Workers insured by the Mexican Social Security Institute (IMSS) and unemployed people relative to Economically Active Population (EAP) s.a. / Seasonally adjusted Source: IMSS and INEGI Source: Banco de México 6
Extraordinary support has been provided by external conditions, particularly from advanced countries On the surface this may sound contradictory Two positive factors Demand for Mexican exports Unusually favorable financing conditions 7
Manufacturing exports have been increasing, although with some recent moderation Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Manufacturing Exports by Destination 2007=100; s.a. Total U.S. Others 180 160 Industrial Production * 2007=100; a. e. U.S. Mexico 110 105 140 100 120 95 100 90 80 85 60 80 s.a. / Seasonally and trend-adjusted Source: Banco de México s.a. / Seasonally adjusted */ U.S. and Mexico's correlation is close to 0.9 Source: INEGI 8
Monetary easing abroad has translated into domestic interest rates at or close to all-time lows Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 1-day 1-month 3-months 6-months 1-year 5-years 7-years 10-years 20-years 30-years Foreign Holdings of Peso Government Bonds % of Local Government Bonds held by Foreigners in EM 1 21 18 2009 2010 2011 2012* Yield Curve % 9 8 7 6 15 5 12 4 1/ Include Brazil, Hungary, India, Indonesia, Malaysia, Mexico, Poland, Thailand and Turkey Source: Barclays */ October 26, 2012 Source: Banco de México 9
The most serious risk associated with capital inflows is not the ever-present possibility of a reversal A sudden stop may occur for reasons not exclusively related to the recipient country The most serious risk is ignoring the likelihood of the event Financial crises emerge because people assume that easy credit will last forever Possible capital reversal calls for prudence 10
Contents 1 Current economic rebound 2 Outlook 3 Inflation and monetary policy 4 Concluding remarks 11
The base-case scenario for Mexico s economic outlook assumes the continuation of favorable external conditions GDP Outlook Growth, % 2011 2012 F 2013 F World 3.1 2.5 2.8 United States 1.8 2.1 2.0 Euro zone 1.5-0.5 0.2 China 9.3 7.7 8.1 Brazil 2.7 1.6 3.9 Mexico 3.9 3.9 3.6 F/ Forecast Source: Consensus Forecasts, Latin America Consensus Forecasts and Asia Consensus Forecasts; October 2012 12
Significant external risks relate to the developments in the United States and Europe United States Risks The Fiscal Cliff could lead to a fall of 0.3% in GDP in 2013 1 As industrial production in the U.S. slows, the impact on the Mexican economy could be significant 2 Europe The difficulty in resolving underlying problems could generate new bouts of volatility and risk aversion 1/ Congressional Budget Office (2012) An Update to the Budget and Economic Outlook: Fiscal Years 2012 to 2022, August 2/ For an estimate of the possible impact of U.S. industrial production on Mexican exports, see Garcés, D. (2002) Análisis de las Funciones de Importación y Exportación de México, Documento de investigación No. 12, Banco de México, December. 13
Contents 1 Current economic rebound 2 Outlook 3 Inflation and monetary policy 4 Concluding remarks 14
Feb-07 Jun-07 Oct-07 Feb-08 Jun-08 Oct-08 Feb-09 Jun-09 Oct-09 Feb-10 Jun-10 Oct-10 Feb-11 Jun-11 Oct-11 Feb-12 Jun-12 Oct-12 Annual inflation has been rising mainly as a result of agricultural price pressures Consumer Price Index Annual; % Headline Non-core 10 8 6 4 2 0 */ First half Source: INEGI * 15
Feb-07 Jun-07 Oct-07 Feb-08 Jun-08 Oct-08 Feb-09 Jun-09 Oct-09 Feb-10 Jun-10 Oct-10 Feb-11 Jun-11 Oct-11 Feb-12 Jun-12 Oct-12 However, core inflation has also been increasing Core Price Indices Annual; % Core Core Merchandise Core Services 8 6 4 2 0 */ First half Source: INEGI * 16
Monetary policy will have to be adjusted in a timely way if convergence of inflation to the 3% target is endangered Need to evaluate whether current price pressures are transitory Two sources of risk should be especially monitored Amplification of second-round effects from external shocks Aggregate demand pressures The most essential challenge continues to be the anchoring of inflation expectations on the 3% permanent target 17
Contents 1 Current economic rebound 2 Outlook 3 Inflation and monetary policy 4 Concluding remarks 18
Concluding remarks The ongoing economic recovery does not imply that the economy is growing at rates that are sufficient to meet social needs or exploit potential opportunities Mexico needs to consolidate macroeconomic stability Additionally, total factor productivity growth should be facilitated Considerable efficiency gains seem possible in the services sector and in non manufacturing industries Remove obstacles in order to reduce informality and facilitate competition 19
Mejoran las perspectivas económicas mundiales 20