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Eduardo Loria Graduate Studies Division – School of Economics (UNAM) http://www.eduardoloria.name, [email protected] MEXICO 2010-2012. MACROECONOMIC FORECAST Eduardo Loría1 August 6, 2010 PRESENTATION The following country report presents: a) the main and most recent features of the Mexican economy, and b) an annual and quarterly forecasting for 2010.3-2012.4. The tumultuous world scenario and the Presidential and Congress elections in Mexico in 2012, restrain a further outlook. 1. GENERAL FRAMEWORK 1.1 Recent events In spite of the adverse news regarding the financial (fiscal) problems and poor economic performance of the United States (US) during de 2Q, the Mexican economy has had an outstanding recovery during H1, because of the strong industrial exports and a sharp improvement in the agricultural sector. The industrial performance had a lot to do with the recovery of the US’s industrial activity. We cannot yet conclude if the real estate and construction sector as well as the labor markets will recover soon in both countries, since they are so closely linked. The 2009 world wide crisis let us see the important economic dependence to the American Economy, notwithstanding the economic (trade and investment) diversification of recent years. 1 Coordinator of the Center of Modeling and Economic Forecasting. School of Economics, UNAM. [email protected], www.eduardoloria.name I thank the technical assistance of Jorge Ramirez, Adriana Diaz, Catalina Libreros, Daniela Tirado, Emmanuel Salas, Juan Marquez and Leonardo Lopez. The contents not necessarily represent the institution’s point of view. Total or partial reproduction is allowed only if it is quoted. 1 Eduardo Loria Graduate Studies Division – School of Economics (UNAM) http://www.eduardoloria.name, [email protected] Foreign Direct Investment in Mexico by Country of Origin Mexican Exports to US and EU Uncertainty and nervousness in the markets (commodities, currencies and stocks) and the ongoing speculative practices are the sign of the times. Despite the blur and uneven recovery of developed economies, capital flows and currencies continue stumbling. A number of analysts have been warning about the increasing odds of a double dip recession, and a fiscal crisis world wide. Needless to say, the lack of cash, the credit crunch, the financial insolvency and the bankruptcy of companies and individuals will persist despite the financial rescue and the continuance of economic stimulus in many countries -both fiscal and monetary. If that is the case, it is plausible to consider a strong contagion to the Mexican economy. As an example, let’s recall the severe contractive effects on output, trade, remittances 2 Eduardo Loria Graduate Studies Division – School of Economics (UNAM) http://www.eduardoloria.name, [email protected] and foreign and domestic investment coming from the international shocks that affected Mexico last year. In the next pictures we compare those effects in the two previous Mexican crises. Effects of the External Shocks on the Mexican Economy in Two Crises The total macroeconomic cost in 2009 was near 30 times higher compared to what happened in 1995 in terms of GDP. 3 Eduardo Loria Graduate Studies Division – School of Economics (UNAM) http://www.eduardoloria.name, [email protected] Total Costs of External Shocks (% GDP) 5 4.5 4 3.5 % GDP 3 2.5 2 1.5 1 0.5 0 1994-1995 2008-2009 1.2 Structural changes. Despite these outstanding negative effects on the external sector, it is worth noting that neither output nor unemployment weres affected, as it used to happen in the past. MEXICO: Economic Growth and Unemployment 10 8 6 6.2 6.8 5.5 4 2 0 -2 -4 -3.5 -6 -8 1980 -6.2 1985 1990 -6.5 1995 GDP 2000 2005 U 4 Eduardo Loria Graduate Studies Division – School of Economics (UNAM) http://www.eduardoloria.name, [email protected] If we consider the previous crises in terms of the elasticity of employment to GDP, we have the lowest rate ever in 2009: GDP, UNEMPLOYMENT AND ELASTICITIES GDP* U* εUY 1983 -3.49 61.90 -17.76 1995 -6.22 68.24 -10.97 2009 -6.54 37.81 -5.78 * Annual Growth But it should be stressed that these features have happened in the presence of an impressive raise in the female participation rate. FEMALE/MALE PARTICIPATION RATE .64 .62 .60 .58 .56 .54 .52 00 01 02 03 04 05 06 07 08 09 Taken into account that unemployment did not grow as it used to be, some facts seem to be highly explicative. On the one hand, it has been an impressive increase in the informality, mainly in women, and underemployment in the case of men. 5 Eduardo Loria Graduate Studies Division – School of Economics (UNAM) http://www.eduardoloria.name, [email protected] FEMALE/MALE RATIO 68 64 60 56 52 48 44 40 36 32 00 01 02 03 04 informality 05 06 07 08 09 underemployment Therefore, this kind of rapid labor market precariousness should be considered as the main cause of the very low rate of unemployment. The traditional valve of escape – namely emigration to the USA– is not longer working. 2. Economic Forecasting The Center of Modeling and Economic Forecasting of the School of Economics of UNAM (http://www.economia.unam.mx/cempe/), in order to set expectations of the economic agents, provide the most conservative outlook that must be considered as a base line scenario according to the information we have already presented. This forecasting exercise contemplates the following crucial factors: • A slowdown pace of economic growth in the US. • The stagnation of remittances coming from the US. • The severe effects of rampant crime on macroeconomic variables such as tourism and investment (domestic and foreign). • The lack of Labor and Fiscal reforms and their effects on public and private investment. • The uncertain evolution of the oil prices and the secular reduction trend of exports. 6 Eduardo Loria Graduate Studies Division – School of Economics (UNAM) http://www.eduardoloria.name, [email protected] • The evolution of presidential campaigns (to start in 6 more months) and the final outcome of elections in July 2012. Our forecast points out lower growth rates of GDP and employment in the quarters and years to come. To sum up, we depict a conservative Mexican macroeconomic scenario for 2010.3-2012.4 which will depend mainly on what will happen in Mexico and in the United States. Unfortunately, several external shocks shall continue; in our country, the lack of safety of people and investors has intensified. Rampant crime will affect economic activity probably more than financial turmoil. Likewise, the advances of the structural reforms, particularly labor, fiscal, educative and energetic have stopped and they are damaging basic aspects of the long run growth. This makes clear that institutional aspects are deteriorating and affecting the economic variables. Finally, it is plausible to consider world inflationary pressures due to climate change that seriously affected the prices of commodities. This is also an adverse fact for the finances of the Mexican government, as well as the reduction of the oil exports. These factors put a lot of pressure on next years’ budget. 7 Eduardo Loria Graduate Studies Division – School of Economics (UNAM) http://www.eduardoloria.name, [email protected] Forecasting Assumptions, 2010 – 2012 (Growth Rates) Variable 2010 2011 2012 12.9 13.2 13.5 1.1 1.1 1.2 1.5 2.3 3.0 1.9 2.0 2.5 4.4 4.4 4.4 Exchange Rate Nominal1 2 Real 3 US GDP 3 US CPI Interest Rate (Cetes, 28 days) 1 Pesos per US Dollar, annual average; Unit; 4 % points, annual average. 2 4 Index, 1993 = 1.0; 3 The Economist Intelligence Annual Forecasting: 2010-2012 Variable 2010 2011 2012 4.8-5.1 2.9-3.4 3.0-4.3 2.5 1.0 1.5 Employment ( Change)2 869.0 368.0 544.0 Unemployment rate 5.4-5.6 5.6-6.4 4.6-5.1 Average Real Wages1 0.4 1.1 2.5 Inflation (CPI)3 4.7 3.7 3.8 Trade Balance4 -10.3 -9.6 -10.2 As % of GDP -1.06 -0.95 -0.98 Current Account4 -11.0 -6.6 -10.3 -0.65 -0.98 GDP1 Employment1 As % of GDP 1 2 -1.13 3 4 Percentage Change; Thousands of people; December – December; Billions of USD; Recent Estimates: September 28, 2010. Source: Own calculations, based on Eudoxio: Macroeconometric Model of the Mexican Economy. 8 Eduardo Loria Graduate Studies Division – School of Economics (UNAM) http://www.eduardoloria.name, [email protected] Quarterly Forecasting: 2010.3-2012.4 Variable 2010 2011 2012 GDP 4.8-5.1 2.9-3.4 3.0-4.3 I 4.3 2.7-2.9 2.7-4.3 II 7.6 1.4-2.2 3.3-4.0 III 3.7-4.4 2.9-3.5 1.7-3.1 IV 2.2-2.3 4.4-4.8 4.3-5.7 Unemployment 5.4-5.6 5.6-6.4 4.6-5.1 I 5.4 6.1-6.7 5.0-5.5 II 5.2 5.7-6.6 4.7-5.3 III 5.6-5.8 5.8-6.6 3.9-4.7 IV 5.4-6.0 4.9-5.6 4.1-5.4 Own calculations, based on Eudoxio: Macroeconometric Model of the Mexican Economy. 9