Download MEXICO ECONOMIC OUTLOOK (2016-2018)

Eduardo Loria, School of Economics (UNAM)
[email protected]; www.economia.unam.mx/cempe; www.economia.unam.mx/profesores/eloria/
MEXICO ECONOMIC OUTLOOK (2016-2018)
By
Eduardo Loria1
Center for Modeling and Economic Forecasting
School of Economics, UNAM
Mexico City
Fall Meeting
Toronto Canada, October 2016
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Coordinator of the Center for Modeling and Economic Forecasting. School of Economics, UNAM. The contents of this
report do not necessarily represent the institution’s point of view. Total or partial reproduction is allowed only if it is
quoted. I am grateful to Emmanuel Salas and Jorge Ramírez for their collaboration.
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Eduardo Loria, School of Economics (UNAM)
[email protected]; www.economia.unam.mx/cempe; www.economia.unam.mx/profesores/eloria/
1. Recent Trends
In the contractionary environment that has plagued Latin America since the end of high-priced
commodities period, Mexico has been an exception, maintaining a constant but very low growth rate,
and the behavior of some of its macroeconomic variables is worrisome for future growth prospects.
The first example of these worrisome tendencies in Mexico are the strong, external imbalances that
have been observed during the last two years. Furthermore, the international turmoil has resulted in
capital outflows of US11.368 billion: unprecedented volumes for a first semester and similar to the
1995 crisis.
Manufacturing and exports have lost vigor, due to the low growth of US industry. Since the signing of
NAFTA, the primary destination for Mexican exports -and thus the main growth engine- has been the
industrial sector of the United States. US industry has suffered from an appreciation of the US Dollar,
brought about by the uncertainty surrounding the normalization of that country’s monetary policy.
Imbalances are not limited to the external sector and can also be perceived in the sharp increase of
public debt. After the great recession of 2009, Mexico introduced expansionary, aggregate-demand
policies that generated deficits. These deficits have led to a strong rise of public debt, negating the
trend that this indicator had followed since the structural reforms of the 1990’s.
While the exchange rate volatility of the past two years has not affected consumer prices, it has had an
impact on producers and could bring inflationary pressure in the medium term.
Consumer prices have remained at a historically low level (2.73% annualized to August), below the
central bank’s 3% objective. This result is compatible with the negative and increasing output gap. In
regard to the inflation target, although no demand pressures exist, inflationary leaks from producer to
consumer prices are now perceived as an important pressure for the achievement of the target, since
producer prices have grown 5.6%.
Given the above context, contractionary fiscal and monetary policy has been deployed to contain these
imbalances, systematically reducing growth forecasts for 2016 and 2017. Forecasts have not only been
systematically reduced by private analysts, but also by the monetary and fiscal authorities themselves
(see Figure 1).
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Eduardo Loria, School of Economics (UNAM)
[email protected]; www.economia.unam.mx/cempe; www.economia.unam.mx/profesores/eloria/
Figure 1
GDP growth forecast modifications, 2016
2.75
2.69%
RATE OF GROWTH
2.65
2.55
2.44%
2.45%
2.45
2.35
2.28%
2.25
2.15
EJanuary
NERO
F
EBRERO
February
M
ARZO
March
AApril
BRIL
M
AYO
May
JJune
UNIO
JU
LIO
July
Source: Encuesta sobre las Expectativas de los Especialistas en Economía del Sector Privado.
2. Assumptions on National Policy and the External Environment
2.1 Contractive Fiscal Policy
As mentioned above, the debt-to-GDP ratio (47.6%) and the speed with which it has risen have reached
alarming levels. In the current context, this has prompted the rating agencies S&P and Moody’s to
downgrade Mexican sovereign debt rating, which will result in higher financial debt payments.
The Ministry of Finance has implemented a restrictive fiscal policy, based on increasing the efficiency
of taxation, raising the domestic price of fuel and introducing several budget cuts for 2016 and 2017.
We do not expect significant reductions on social expenditure, since the fourth of six years of the
current presidency has just ended, and 2017 will bring local elections in states that are key for the next
presidential hopefuls, like Estado de Mexico.
2.2 Contractive Monetary Policy
During this year and in 2015, Mexico has been experiencing the lowest inflation rates on record.
Inflation is now below Banxico’s 3% annual target, and these rates are consistent with the negative
output gap (Figure 2).
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Eduardo Loria, School of Economics (UNAM)
[email protected]; www.economia.unam.mx/cempe; www.economia.unam.mx/profesores/eloria/
Figure 2
OUTPUT GAP, % OF POTENTIAL GDP
3
2
1
0
-1
-2
-3
-4
-5
-6
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
Source: Own calculations, based on information of Inegi (2016).
Nevertheless, the global appreciation of the US Dollar has been particularly hard on Mexico and, as
mentioned above, the producer price index is showing signs of a spillover to consumer prices. This has
led Banxico to address exchange-rate concerns with contractionary monetary policy, raising the
interest rate twice this year and warning the hikes will persist if prices continue to be pressured by the
exchange rate.
2.3 External Environment
US industry is vital for the economic growth of Mexico, due to the high level of linkage in the chains
of value. Weakness in this sector has had an impact on production and exports in Mexican
manufacturing, affecting growth and the trade balance.
Additional external factors that have impaired the performance of the Mexican economy include: a)
the appreciation of the US Dollar; b) the uncertainty generated by the speed of the normalization of
monetary policy in the US; c) the electoral period in the US; d) the fall of international oil prices; e)
Brexit.
3. Forecast Summary
Growth forecasts are based on a context of restrictive policy in both the monetary and fiscal fronts. In
other words, we continue to expect budget cuts and an increasing interest rate, as the authorities seek
to simultaneously contain external imbalances, lower the fiscal deficit and keep inflation levels in
check.
The exchange rate has become a key variable and we expect further volatility in the remainder of the
year. The outcome of the US presidential election and the monetary normalization process will have
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Eduardo Loria, School of Economics (UNAM)
[email protected]; www.economia.unam.mx/cempe; www.economia.unam.mx/profesores/eloria/
short, medium and long term impacts on the Mexican economy, particularly on the exchange rate and
economic growth.
It is very likely that US industrials will recover, leading to a higher growth rate for Mexico in 2017.
4. Policy Issues and Uncertainties
The US presidential election will have powerful effects on economic and social variables in Mexico,
regardless of the outcome. While the Republican candidate has issued strong attacks and warnings, the
Democratic platform also includes protectionist policies that have the potential to damage Mexican
growth prospects. In fact, both candidates have proposed thorough revisions of NAFTA, which, though
still unclear, are likely to follow a protectionist agenda.
Both the normalization of monetary policy in the US and Brexit have resulted in capital outflows, so
we cannot know how much more they could affect the balance of payments and the adjustment of
interest rates, placing further pressure on an already low growth rate. Mexico is bound to follow the
Fed rate, but perhaps this will be done in a more aggressive manner to keep international uncertainties
at bay.
The approval rating of President Peña Nieto has reached historic lows, weakening the rule of law in
general and the implementation of structural reforms, as reflected by the teachers’ movement in the
southeastern states.
Indeed, the drop in the President’s approval rating could mean the administration of the country will
go to a different party in 2018.
Among the factors that add uncertainty to this environment we find a current account deficit that has
reached 3% of GDP, notwithstanding the low growth. This is a troubling sign, because a trend has
been set in the last few years and monetary authorities feel pressured to maintain their contractionary
policy. As mentioned above, this is not an isolated problem, given the historic capital flight of
US11.368 billion.
It is for this reason that Banxico has requested additional measures of consolidation in public finances,
in the form of further spending cuts, and the threat of additional rate hikes remains.
Fears about Mexican sovereign debt, now 46.9% of GDP, have reached the rating agencies S&P and
Moody’s. The lower rating will eventually translate into higher payments in total foreign debt.
Lastly, the potential for further changes in the administration, like the September 17 resignation of the
minister of finance, is a cause for concern.
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Eduardo Loria, School of Economics (UNAM)
[email protected]; www.economia.unam.mx/cempe; www.economia.unam.mx/profesores/eloria/
4. Summary Table for Forecast
2013 2014 2015 2016 2017 2018
GDP and Expenditure : Constant Prices, Growth rate
Private Consumption
2.2
1.8
3.2
2.7
3.4
3.7
Government Consumption
1.0
2.4
2.3
-13.6 -0.5
1.3
Gross Fixed Capital Formation
-1.6 3.3
4.3
3.0
3.3
4.4
Exports of Goods & Services
2.8
4.9
-1.2
-0.3
3.8
3.7
Exports of Goods
2.5
4.5
-4.1
-3.5
3.5
3.4
Exports of Services
7.5
2.8
-5.0
-1.9
2.2
2.2
Imports of Goods & Services
2.5
4.5
-4.1
-3.7
2.0
1.8
Imports of Goods
2.8
4.9
-1.2
0.8
3.7
3.5
Imports of Services
20.3 -5.3 -6.8
-6.5
2.2
2.3
GDP
1.4
2.3
2.5
2.1
2.5
2.8
Key Economic and Global Indicators
Inflation rate
3.9
4
2.1
3.3
3.4
3.1
Wage inflation (%) (1)
2.9
4.1
4.1
4.3
3.7
3.6
Unemployment Rate (%)
4.9
4.9
4.3
4.0
4.1
4.1
Output gap (2)
0.33 0.04 0.08 -0.38 0.07 0.08
Crude oil price ($ pb, annual average)
104 93.6 49.7
40.3
45
44
World trade (% change, volume)
3.3
3.2
3.0
2.9
2.9
2.8
National currency per US$
12.7 13.3 15.8
18.4 18.2 19.0
Japanese yen/$
0.13 0.12 0.13
0.18 0.17 0.18
Chinese yuan/$
2
2.1
2.5
2.8
2.7
2.8
$/euro
17.0 17.7 17.6
21.0 21.0 22.0
(1) Manufacturing medium wages in real terms.
(2) Percent of potential GDP
I thank Emmanuel Salas and Jorge Ramirez for their extraordinary research assistance.
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