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ECONOMIC OUTLOOK 2012 June, 2012.
Looking back and forward: • As we reach the end of the first half of the year we can conclude that the Mexican economy has managed to relatively sort out the significant signs of global instability and an external economic environment marked by growing signs of weakness. • Since the first months of 2012, economic activity has been picking up speed without generating significant pressures in the markets for factors and products. • Based on this performance the Mexican economy is expected to extend this expansion during the second half of the year and to consolidate a base of growth for 2013 that is less dependent on external factors. • This scenario, however, may be adversely affected by some risk factors, both external and internal that have been assuming greater significance in recent months. For that reason it is necessary to closely follow these factors so as to be in a better position to promptly anticipate any shift in the economic outlook.
The euro crisis: source of the financial instability • The euro crisis is a re-election of three factors that have combined to make it all the more virulent: the sovereign debt crisis, banking crisis and a crisis of the process of the eurozone. • The situation has deepened further now that the prospect of a recession in the region looking is looking increasingly probable. Source: GEA with information from the OECD
The euro crisis: deep and prolonged • A chronology reveals the intensity and continuity of the problem: 2011
The US is experiencing a generalized reduction in demand • Estimates of the main US macroeconomic indicators for 2012 have been adjusted downward. DOWNWARDLY REVISING 2012 FORECAST (differences between estimates as of January and June 2012) Source: Blue Chip.
…and medium term expectations have been scaled back. • GDP: The 2012 growth estimate was adjusted downward in June by 0.2% to 2.1%. • Industrial output: Such activity grew by 5% in the past three quarters, however the pace of expansion is expected to narrow given the limited extent of inventory accumulation and the degree to which demand has slackened in Europe and Asia. Source: Blue Chip.
… unemployment will not favor internal demand. • Employment: • In May the unemployment rate increased from 8.1 to 8.2%. • For the first time this year, analysts raised their estimates of 2013 unemployment (from 7.7% to 7.8%), as opposed to a projected 8.1% average for 2012. • Non farm payrolls were revised downward for March and April by 49,000 jobs and for May a paltry 69,000 positions were filled. Job growth is projected to average 145,000 per month. Joblessrate Non farmpayrolls Source: Department of Labor
And yet, it moves: the Mexican economy grows… • La economía mexicana ha mantenido una dinámica independiente e incluso aceleró su crecimiento en los últimos meses, a pesar del deterioro del entorno externo. • Después del “efecto rebote” de 2010, en el primer semestre de 2011 se observó un proceso de desaceleración. Sin embargo, en los últimos meses de 2011 y primeros de 2012 la actividad ha recuperado su dinamismo. REAL GDP 2006 I = 100 Source: GEA based on information from INEGI.
… as it reenters an expansive phase… • Both coincident and leading indicators, suggest the Mexican economy is in an expansive phase (above the 100 point reading for which 2006 serves as the base year). • Near the end of 2011 the coincident indicator pointed to a period of economic contraction before giving way to a new expansion of phase. Coincident Leading Source: GEA with information from INEGI
… drivenbyinternaldemand… • All three demand components have been experiencing a prolonged period of expansion. • Consumption: Consumption, especially retail, continues to sustain positive growth for a third consecutive year, driven by an expanding wage mass. RETAIL AND WHOLESALE REVENUES (% variation YoY) Source: GEA with information from INEGI
… drivenbyinternaldemand… • Wage mass: The rise in consumption has been predominantly driven by growth in the wage mass. Two indicators in particular have tracked this expansion: i) in the case of the formal sector (IMSS payroll data) employment has sustained since late 2010 an expansion of close to 4%, and ii) in the case of the informal sector (implicit in the ENOE) there has been a recovery both in employment and wage levels. WAGE MASS (% variationYoY) FORMAL SECTOR (IMSS) TOTAL ECONOMY (ENOE) Source: GEA with information from IMSS and INEGI (ENOE)
… with investment on the rise … • Investment: During 27 consecutive months investment has now grown and has now surpassed the historical highs of 2008. • During the most recent quarter it grew at a 12 month rate of 8.6%, though in seasonally adjusted terms, compared to the immediately preceding month such investment was essentially flat. Gross fixed investment (% variationYoY) (2006 level=100) Source: GEA with information from INEGI
… while taking advantage of greater external competitiveness. • Exports: Mexico’s non petroleum exports continue to gain market share in the countries to which they are traditionally shipped. Growth in non-traditional markets has been even greater. Manufacturing exports have grown by more than 50% since December 2008 at the same time as those in the automotive segment have doubled. EXPORTS (% variation YOY) INDICE 2008=100 Source: GEA with information from INEGI
Supply has quickly responded … • Industrial output: The most recent report revealed a 0.65% sequential, seasonally adjusted expansion and a 12 month rate of 3.6% growth in industrial activity. • Construction has sustained solid growth during the first four months of the year and growth in manufacturing was even more pronounced (+4.8% and +4.6%, respectively). Source: GEA with information from INEGI
… even more robustly than services… • Service sector: Of the three sectors of the Mexican economy, services have displayed the greatest response capacity. In addition, the expansion of supply has yet to generate any inflation pressures, which suggests that there are no obstacles to continuing expansion. SERVICE SECTOR REVENUES (% variationYoY) Source: GEA with information from INEGI
Only the agricultural sector has grown at a much slower pace than other industries. • Agricultural sector: Mexico’s agricultural sector has been severely affected by the severe drought of the past two years and other adverse climatological developments. Livestock production has been even harder hit than crop output, a difference that is noticeable, though with a certain lag, on the level of consumer prices. AGRICULTURAL GDP (% variationYoY) Source: GEA with information from INEGI
This time the recovery has been accompanied by renewed credit • Financing: Credit issued by commercial banks to the private sector has once again begun to grow at the sort of levels we witnessed prior to the crisis of 2008 and today serve as a source of support for the expansion in demand. • PRIVATE SECTOR FINANCING BY SEGMENT • (% variation YoY) Source: GEA with information from Banco de México.
… to summarize: growth is solid … • Economic activity displays balanced growth. • There has been a diversified base to this growth: • is not vulnerable to short term variations in response to factors that exert an internal effect (strong consumption, solid investment), or one abroad (dynamic exports). • There have been no major imbalances in major markets: • Inflation remains within the central bank’s target range. • Annual inflation: 4.30% vs. the target range (3.0% - 4.0%). • The current account is being financed with Foreign Direct Investment. • The current account deficit stands at US$47 mn as opposed to US$4.37 bn in FDI 1Q12 o 2012 • Wage growth has been in keeping with gains registered in productivity • Wage increases averaged 0.73% between January 2011 and March 2012 (IMSS data), while productivity in the manufacturing sector has risen 1.05%.
… and financial bullet-proofed from episodes of financial volatility… • The Mexican economy has considerable resources with which to stabilize the foreign exchange market should forex volatility becomes excessive. THE MEXICAN ECONOMY’S FOREIGN CURRENCY NEEDS 2012 (figures in billions of dollars)
… and on the international stage stands out for its notably restrained rate of inflation… • The Mexican economy has been recognized for maintaining a healthy degree of economic growth that also appears sustaining. • Prices: Inflation in Mexico is contained and running at levels that are similar to those of Chile and Colombia and significantly lower than those of Argentina and Brazil. Source: GEA with information from IMF
… and foritsgrowth. • Growth: Mexico, Chile, Colombia and Argentina have registered similar rates of economic growth, however, Brazil and Argentina have experienced a very pronounced slowdown and are even at risk of demonstrating that they are based on a non sustainable model. Brazil Mexico Source: GEA with information from IMF
There have been changes in the projected panorama, which we summarize in the following points • The government’s economic program for 2012 was adopted based on a consensus regarding the following projections of the economic and fiscal environment: • A more solid recovery of the US economy • Limited impact from the European crisis on emerging countries thanks to sustained strength in the Chinese economy. • Terms of reference favorable to Mexico in the mid term • The impact of prices of agricultural goods on headline inflation of a transitory nature. • A limited pass-through at a time of increasing exchange rate stability. • Fiscal policy was designed to achieve a gradual consolidation as reflected in a reduction in the financial deficit. • Monetary policy to remain neutral and always alert to inflation pressures; the authorities began to consider a reduction in the central bank’s reference rate. • Some of these assumptions, however, are no longer valid.
1. The US is more vulnerable to a negative shock… • The broader economic weakness leaves it more vulnerable • Job creation: For the past three months growth has been weaker than expected. • Retail sales and manufacturing orders have fallen in the past two months. • Industrial output: a setback in May; automotive production was down 1.5% (April sales were less than in the same month of 2012). • Disposable income remains flat. • Home equity is 40% weaker than three years earlier. • GDP: 1.9% growth expected for 2012 • The dollar has been strengthened • A 10% appreciation in relation to the euro reduces the competitiveness of US exports. • Deflation: Prices fell 0.3% in May due to sharp reductions in the case of agricultural products and gasoline, but core inflation remained at a 12 month rate of 2.3%. • Inflation risk has led the Fed to resist calls for greater monetary easing.
… as it has yet to conduct a fiscal adjustment. USA: TOTAL DEBT (as a % of GDP) • Debt is approaching 100% of GDP, a level Washington has assumed previously only during times of war and immediately following the Great Depression. • The White House needs congressional authorization to raise the debt ceiling • The fiscal expansion implemented in response to the 2008 crisis accounted for 7% of GDP and the consolidation has been quite limited. The spending cuts called for in congressional agreements represent more than 5% of GDP.. USA: PUBLIC DEFICIT (% of GDP) Source: GEA with information from the US Department of the Treasury.
This situation could affect the Mexican economy. • The “fiscal cliff” • Fiscal margins expire at the end of 2012 • US$560 bn in deficit reduction (3.5 % of GDP) • US$260 bn: Temporary tax cuts (Bush) • US$125 bn: Temp. Reduction in payroll taxes (Obama) • US$40 bn: Unemployment benefits • US$98 bn: Automatic spending cuts • The uncertainty may undercut demand by the equivalent of 0.5% of GDP in 2012. Congress’ inability to act could lower demand 4% • The impact on the Mexican economy* • 2012: 0.2%-0.25% of GDP • 2013: 1.6%-2.0% of GDP */ Guajardo, Leigh and Pescatori “Expansionary Austerity. New International Evidence” IMF 2011.
2. The petroleum market has experienced a dramatic adjustment… • Between March and June, international prices fell 30% • Global output of crude is running at an all-time historical high: 91.1 million barrels daily (mbd) as opposed to global demand of US$88.9 mbd • Increased output from Saudi Arabia (designed to offset a possible Iranian embargo that has yet to take effect), and from Iraq, Libya and the US • In Mexico, • The price of Mexico’s export blend is now lower than the 2011 average A 34% drop since March 80.3 Average budgeted price for 2012 63.0 53.9 Source: GEA with information from PEMEX
… and internal production continues to fall. • During the second half of the year (2012) petroleum income is likely to fall below 2011 levels. • Petroleum revenues currently account for 33.7% of total budgeted income. CRUDE OIL: DOMESTIC PRODUCTION (millions of barrels daily) Source: GEA with information from PEMEX
3. Weakness in public finance has become increasingly accentuated. • Between January and April public spending was ratcheted up considerably. • The trend is NOT toward the sort of fiscal equilibrium required under the Federal Law on the Budget and Fiscal Responsibility. Public sector Federal Government Source: GEA with information from the Ministry of Finance.
Instead spending has been based on transitory revenue sources. Revenues- expenditures: Jan.-Apr. (real rate of growth) • Revenue growth has been petroleum based, but such revenues have ceased to grow and more recently have begun to fall. • Growth in recurring revenues falls short of the rate of GDP • Fiscal consolidation was only observed in 2010 • Programmable spending is being expanded once again and with no corresponding increase in recurring revenues.
4. The rebound in inflation may prove to be a more enduring development … • Inflation (CPI) fell to a low of 3.04% in March 2011. It has since trended slightly higher (it broke above 4% in January, and came in at 3.85% in May). Core inflation has held steady, averaging 3.3%, but: • The index of goods has risen faster than the headline rate since February 2011 • The wholesale index has outpaced the headline rate since January 2011 CONSUMER AND PRODUCER INFLATION (% variation YoY) CONSUMER PRICE INDEX: GOODS AND SERVICES (% variation YoY) Source: GEA with information from INEGI.
…with greater incidence from the exchange rate. • There could be a change in the pass-through. • Previously: • Prior to July 2008: there was a slight but persistent, real appreciation of the peso • Following March 2009: internal demand grew depressed, and there was real appreciation • Now: • Following July 2011: Real depreciation, uncertainty and a firming of internal demand. THE EXCHANGE RATE (pesos/dollar)
5. Increasing volatility in capital flows. FOREIGN HOLDINGS OF GOVERNMENT SECURITIES AND THE EXCHANGE RATE (pesos / dollar) Source: GEA with information from Banco de México
5. Increasing volatility in capital flows. • The increase in foreign holdings of Mexican government securities has left the foreign currency more susceptible to shifts in the expectations of international investors.. • FOREIGN HOLDINGS OF GOVERNMENT SECURITIES • (variation MoM, figures in millions of dollars) Source: GEA with information from Banco de Mexico.
Conclusion: The marco environment could become increasingly complicated … • The risks that we have described may or may not materialize, and there may be only one or more to emerge simultaneously. • Given the potential scale of the damage that could be inflicted on the Mexican economy, the authorities cannot afford to overlook the risks and must have in place a contingency plan that is effective, coherent and comprehensive. • The dilemma: by acting too soon they could compromise the country’s growth prospects; if the act later it may prove to be a pro-cyclical move in the midst of a contractive phase. • Maneuvering room: • Fiscal policy: spending cuts in 2012 and 2013 • Monetary policy: hold steady, lower or raise interest rates? • Foreign exchange policy: stronger interventions to stabilize the currency. • Credit policy: promote growth
… at a very delicate time for decision making. • In order to assure that the necessary decisions for the coming year are made in the most efficient manner, they must be taken in a timely, pertinent and credible manner. That means that they must be fully supported by both the outgoing and incoming federal administrations. • The economic program for 2013 must be proposed to Congress no later than December 15 and approved by December 31. • Markets will need the administration elect to offer at the earliest possible date a clear and explicit exposition of the strategy it intends to implement. If it fails to do so, it will run the risk of generating unnecessary uncertainty that will only magnify the sense of uncertainty surrounding developments abroad. • In light of these circumstances, it is indispensable that Mexico achieve a smooth transition in matters of economic policy.
Macro projections GROWTH AND EMPLOYMENT INDICATORS 2010-2013
MACROECONOMIC FRAMEWORK 2011-2013 * Federal budget projections.
POLITICAL SITUATION & OUTLOOK June, 2012.
As we approach the 2012 presidential elections, the electoral process is playing out on two distinct levels: the perception of major events and the way that is reflected in electoral preferences. • The second debate (June 10) was much more widely watched (in fact, the most widely watched in the history of presidential debates), and offered a better format and production values than the first and only other presidential candidates debate this year. While the public generally gave the candidate of the National Action Party (PAN), Josefina VázquezMota high marks for her performance, that evaluation was not enough to allow her to move firmly back into second place. • The impact of the student movement #YoSoy132 (I am 132), has also affected voter perceptions. However, while there seems to be a public consensus in support of many of the criticisms of the electoral process that the movement has raised, many people are doubtful about whether the movement emerged in a truly spontaneous manner. • Another significant development was the drop in approval for President Felipe Calderón. That reduction in support may have been related to the extent to which the new election law has restricted the president’s speech and publicity during the election campaign, but polling data suggests that it has more to do with public perceptions on issues of security public and the official strategy for securing it.
Have you or have you not heard of the YoSoy132 movement? • Do you generally sympathize or not with the YoSoy132 movement? Yes 69% Yes 24% No 52% • No Opinion 24% No 31% #YoSoy132 • The movement is widely known but does not enjoy the support of a majority of the population.
Do you personally agree or disagree with calls for (issue)? 70 10 20 • Transparency in the electoral process • That people cast their ballots based on informed consent 63 16 21 61 16 23 • That the media become more democratic 0% 20% 40% 60% 80% 100% Agree Disagree • No Opinion • The movement succeeded in focusing attention on issues that had been largely overlooked in the public debate...
Do you personally agree or disagree with the YoSoy132 movement coming out in opposition to Peña? 70% 62% • Disagree 41% 55% 60% 50% 39% 40% 29% 30% 23% 20% 9% • Agree • No Opinion 10% 31% 28% 0% Vázquez Mota Peña Nieto López Obrador • Agree • Disagree • … but the public there was considerably less enthusiastic about the extent to which the movement defined itself in opposition to Peña Nieto.
Do you believe that the YoSoy132 movement was a spontaneous development or that it was orchestrated by someone? 60% • Orchestrated 50% 50% 38% 50% 40% 34% 33% 27% 30% 20% 11% • No Opinion 10% • Spontaneous 34% 28% 0% Vázquez Mota Peña Nieto López Obrador • Spontaneous • Orchestrated • …and for that reason, supporters of the PRI and its presidential candidate express the greatest doubts as to how “authentic” the YoSoy132 movement might be.
Do you generally approve or disapprove of the job Felipe Calderon is doing as President of the Republic? 80 60 40 20 0 'Jun 12 ‘Dec 06 'Jun 07 'Mar 09 'Mar 10 'Mar 07 'Mar 11 'Feb 12 'Feb 08 'Nov 08 'Nov 09 'Nov 10 'Nov 11 'Sep 07 'Nov 07 'May 09 'May 10 'May 12 'May 08 'May 11 'Aug 08 'Aug 09 'Aug 10 'Aug 11 • Approve 52 64 69 67 60 64 66 59 58 54 52 54 52 45 50 48 41 48 45 46 48 47 48 39 • Disapprove 19 25 23 28 34 32 29 36 36 38 40 37 46 53 46 48 54 50 54 51 48 49 50 60 Presidentialapproval • Public support for the president’s performance to date fell sharply in the most recent poll in tandem with a lost of support for Calderon’s signature strategy in matters of public security.
The balance of approval and disapproval ratings for Calderon and Fox over the course of their respective presidential administrations. 60 40 20 0 -20 -40 'Jun 06/12 'Jun 01/07 'Jun 02/08 'Nov 02/08 'Feb 03/09 'Mar 03/09 'Nov 03/09 'Feb 04/10 'Mar 04/10 'Nov 04/10 'Mar 05/11 'Nov 06/12 'Mar 01/07 'Nov 01/07 'Feb 02/08 'Nov 05/11 'Feb 06/12 'Sep 01/07 ‘Dec 00/06 'May 03/09 'May 04/10 'May 06/12 'May 02/08 'May 05/11 'Mar 02 /08 'Aug 03/09 'Aug 04/10 'Aug 06/12 'Aug 01/07 'Aug 02/08 'Aug 05/11 Fox 59 56 27 22 -13 0 19 4 1 20 19 4 -6 1 -4 8 -6 -12 -2 1 26 17 26 25 20 Calderón 39 46 39 26 32 37 23 22 16 12 17 6 -8 4 0 -13 -2 -9 -5 0 -2 -2 -21 • Though the approval ratings of President Calderon have largely mirrored those registered by his predecessor Vicente Fox, but while Fox enjoyed a dramatic resurgence of popularity during his last year in office, so far that of Calderon has taken a sharp turn south.