Manuel Sánchez United States Mexico Chamber of Commerce, Los Angeles, CA, November 15, 2013
Monetary policy and economic outlook themes Output slowdown and signs of an incipient rebound More stringent international financial conditions Lower inflation and monetary flexibility The possibilities from structural reforms 2
Since the middle of 2012 the Mexican economy slowed, and in 23 output fell Real GDP Quarterly and annual change, %, s. a. 8 6 4 2 0 2 4 6 Quarterly Annual (left axis) 3 2 1 0 1 2 3 4 5 8 2007 Q3 2008 Q3 2009 Q3 2010 Q3 2011 Q3 2012 Q3 2013 6 s. a. / Seasonally adjusted Source: INEGI 3
The origin of the declining growth seems to have lied first in softer external demand and then in a contraction of domestic investment Real aggregate demand Quarterly change, %, s. a. 3 2 1 0 Exports of goods and services Investment 1 2 2012 Q2 Q3 Q4 2013 Q2 3 s. a. / Seasonally adjusted Source: INEGI 4
As for external demand, the slowing of manufacturing exports translated into stagnant factory output Manufacturing 2008 = 100, s. a. 110 105 100 Dollar value of exports Real production (left axis) 150 130 95 110 90 85 90 80 70 Jan 07 May 07 Sep 07 Jan 08 May 08 Sep 08 Jan 09 May 09 Sep 09 Jan 10 May 10 Sep 10 Jan 11 May 11 Sep 11 Jan 12 May 12 Sep 12 Jan 13 May 13 Sep 13 s. a. / Seasonally adjusted and trend Source: Banco de México and INEGI 5
As for investment, rising purchases of machinery and equipment have not compensated for the fall in construction investment Total fixed investment 2008 = 100, s. a. 130 120 110 100 90 Construction Machinery and equipment 80 70 Jan 07 May 07 Sep 07 Jan 08 May 08 Sep 08 Jan 09 May 09 Sep 09 Jan 10 May 10 Sep 10 Jan 11 May 11 Sep 11 Jan 12 May 12 Sep 12 Jan 13 May 13 s. a. / Seasonally adjusted and trend Source: INEGI 6
which mainly reflects lower expenditures in public works and private housing building Real construction output 2008 = 100, s. a. 140 120 100 80 Public Private housing 60 40 Jan 07 May 07 Sep 07 Jan 08 May 08 Sep 08 Jan 09 May 09 Sep 09 Jan 10 May 10 Sep 10 Jan 11 May 11 Sep 11 Jan 12 May 12 Sep 12 Jan 13 May 13 s. a. / Seasonally adjusted and trend. The seasonal adjustment and the trend were prepared by Banco de México with data from INEGI Source: INEGI 7
These shocks have weakened labor market conditions Real wage bill and employment 2008 = 100, thousands 48,000 47,000 46,000 45,000 44,000 43,000 42,000 41,000 40,000 39,000 Real wage bill Employees (left axis) 105 100 95 90 85 38,000 2007 Q3 2008 Q3 2009 Q3 2010 Q3 2011 Q3 2012 Q3 2013 Q3 80 Source: Own calculations with data from INEGI 8
Lower consumer confidence has coincided with the first decline of consumption during the post crisis period 110 105 Retail sales and consumer confidence 2008 = 100, s. a. Consumer confidence Retail sales (left axis) 120 110 100 100 95 90 90 80 Jan 07 May 07 Sep 07 Jan 08 May 08 Sep 08 Jan 09 May 09 Sep 09 Jan 10 May 10 Sep 10 Jan 11 May 11 Sep 11 Jan 12 May 12 Sep 12 Jan 13 May 13 Sep 13 s. a. / Seasonally adjusted and trend Source: INEGI and Banco de México 9
Economic activity decelerated in spite of extraordinarily favorable financial conditions in the first part of the year Yield curve % December 30, 2011 December 31, 2012 May 10, 2013 8 7 6 5 4 3 1 day 1 month 3 month 6 month 1 year 3 year 5 year 7 year 10 year 20 year 30 year Source: Proveedor Integral de Precios (PiP) 10
The financial bonanza was shared with other emerging markets Emerging economies: accumulated capital inflows 1 Billion U.S. dollars 2012 2013 100 80 May 60 40 20 0 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51 20 1/ Equity and debt Source: Emerging Portfolio Fund Research 11
largely as a result of expansionary monetary policies in advanced countries Central bank assets 2007 = 100, local currency 500 Federal Reserve Bank of England ECB 400 Bank of Japan 300 200 100 0 Jan 07 May 07 Sep 07 Jan 08 May 08 Sep 08 Jan 09 May 09 Sep 09 Jan 10 May 10 Sep 10 Jan 11 May 11 Sep 11 Jan 12 May 12 Sep 12 Jan 13 May 13 Sep 13 Source: Haver Analytics 12
Mexico has been one of the preferred destinations of portfolio capital flows Emerging economies: foreign holdings of local government bonds 1 Percentage of total government securities in circulation 70 New Zealand Peru Malaysia Mexico Poland Turkey Thailand Korea 60 50 40 30 20 10 Brazil Q4 Q2 Q3 Q4 Q2 Q3 Q4 2010 2011 2012 2013 1/ Federal government debt issued on the domestic market, in local currency Source: Selected countries central banks and finance ministries Q2 Q3 0 13
Since May, market anticipation of tapering translated into lower asset prices for emerging markets, including Mexico Yield curve % May 10, 2013 September 18, 2013 November 14, 2013 8 7 6 5 4 3 1 day 1 month 3 month 6 month 1 year 3 year 5 year 7 year 10 year 20 year 30 year Source: Proveedor Integral de Precios (PiP) 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 15
Some indicators suggest that economic activity might have somewhat picked up in 33 Global Economic Activity Indicator 2008 = 100, s. a. 110 111 Manufacturing 2008 = 100, s. a. 145 110 140 109 109 108 Dollar value of exports 135 108 107 Production (left axis) 130 Apr 13 May 13 Jun 13 Jul 13 Aug 13 s. a. / Seasonally adjusted Source: Mexican National Accounts System (SCNM), INEGI Apr 13 May 13 Jun 13 s. a. / Seasonally adjusted Source: Banco de México and INEGI Jul 13 Aug 13 Sep 13 Services production 2008 = 100, s. a. Construction investment 2008 = 100, s. a. 115 114 94 113 112 93 Apr 13 May 13 Jun 13 Jul 13 Aug 13 s. a. / Seasonally adjusted Source: Mexican National Accounts System (SCNM), INEGI Jun 13 s. a. / Seasonally adjusted Source: INEGI Jul 13 Aug 13 16
The 2014 fiscal package will impact inflation, economic activity, and the use of financial resources Estimated effects of fiscal package for 2014 Effects Annual inflation (end of year) GDP growth Increase in public sector borrowing requirements 40 basis points 0.2 percentage points 1.2 percentage points of GDP Source: Banco de México (2013), Informe sobre la Inflación Julio Septiembre 2013, November 17
The economy is expected to recover gradually in 2014 and 2015 GDP forecast Annual growth, % Banxico Survey 1 Banxico Inflation Report 4.0 4.5 4.2 5.2 4.0 6 5 4 3.0 3.4 3.2 3.4 3 2.5 1.4 0.9 1.7 1.2 0.5 2 1 0 2013 2014 2015 1/ Maximum, average and minimum Source: Banco de México (2013), Encuesta sobre las expectativas de los especialistas en economía del sector privado, October; Banco de México (2013), Informe sobre la Inflación Julio Septiembre 2013, November;andLatin American Consensus Forecasts, October 18
Downside risks to this scenario seem to prevail A pause in the U.S. economic recovery Heightened global risk aversion Further deterioration of the construction sector in Mexico Weakening consumer confidence 19
During the last decade, monetary policy has been focused on achieving a 3 percent permanent inflation target Monetary policy interest rate 1 Annual, % 9 8 7 6 5 4 3 Jan 08 May 08 Sep 08 Jan 09 May 09 Sep 09 Jan 10 May 10 Sep 10 Jan 11 May 11 Sep 11 Jan 12 May 12 Sep 12 Jan 13 May 13 Sep 13 1 / Since January 21, 2008 Source: Banco de México 20
Annual headline inflation has consistently remained below historical levels Annual headline inflation % 18 15 12 9 6 3 0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Source: INEGI 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 22
In 2013, after a temporary spike resulting from agricultural price shocks, annual inflation has recently fallen Headline Core Annual inflation % 7 6 5 4 3 2 1 0 Jan 13 Feb 13 Mar 13 Apr 13 May 13 Jun 13 Jul 13 Aug 13 Sep 13 Oct 13 Source: INEGI 23
The persistent gap between medium and long term inflation expectations and the target remains a challenge Inflation expectations % 7 Next 4 years Next 5 8 years 6 5 4 3 2 1 0 Jan 11 Mar 11 May 11 Jul 11 Sep 11 Nov 11 Jan 12 Mar 12 May 12 Jul 12 Sep 12 Nov 12 Jan 13 Mar 13 May 13 Jul 13 Sep 13 Source: Banco de México 24
Short term inflation risks should continue to be monitored Second round effects from Higher than expected impact from tax changes Higher financial volatility Upward pressures from non core price components 25
Mexico should tackle the most important problem that has inhibitedlong term economic growth Mexico: growth accounting 1 Average annual change, % 1950 1980 1980 2012 GDP per capita 3.4 0.8 Total factor productivity 2.8 0.6 Capital contribution 0.6 0.7 Labor contribution 0.0 0.6 Labor intensity 0.2 0.1 Proportion of working age population 0.2 0.7 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), Catch up Growth Followed by Stagnation: Mexico, 1950 2010, Latin American Journal of Economics, 48(2). The sum of the parts may not add up due to rounding 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 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 long term 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 longterm economic growth 28
Mejoran las perspectivas económicas mundiales 29