Diapositiva 1

1
2005 Mexico Economy Outlook
www.cide.edu/analisiseconomico
2
www.cide.edu/analisiseconomico
ECONOMÍA
Economy Growth
Last year, Mexico registered his better economy
growth in four years, leaving behind the
recession that began in the year 2001. The
economy grew 4.4 supported in the strong growth
of his service sector up 4.6, and a turn around
of the industrial sector up 3.9 after three
years of negative growth. The US sustained
recovery, especially on his manufacturing sector,
was the main cause of the recovery in Mexican
industrial sector from the demand side economy
was sustained by a strong growth on private
consumption, investment and real exports.
3
www.cide.edu/analisiseconomico
ECONOMÍA
Economy Growth
We expect the economy to decelerate slightly this
year to a 4 growth based on strong momentum of
consumption and investment demand, but restrained
by negative net exports growth. We calculate this
year private consumption to add 2.95 and fixed
investment 1.3 to GDP growth. Industrial sector
is expected to grow 3.8 and services 4. At
year-end as the economy accumulates two years of
growth, the output gap will close. For next year,
we forecast GDP growth to fall to 3.7, similar
to our estimation of Mexico GDP potential growth.
4
www.cide.edu/analisiseconomico
ECONOMÍA
5
www.cide.edu/analisiseconomico
ECONOMÍA
6
www.cide.edu/analisiseconomico
ECONOMÍA
CPI Inflation
Despite a positive output gap CPI inflation
accelerated last year to 5.2, from 4 registered
on 2003, significantly above central bank target
of 3 1. Core inflation was 3.8 vs. 3.7 in
the year 2003. Inflation was pushed higher by 1)
greater than expected agricultural prices, 2)
Increasing business cost triggered by high
international price of commodities, and 3) Higher
government controlled prices of energy. As the
output gap narrowed, businesses have gradually
translated cost pressures to consumers. We expect
CPI inflation rate to fall to 3.9 this year
while core inflation remains unchanged at 3.8.
The inflation outlook will be favored by a) a
fall in agricultural prices that has already
taken place on 1Q, b) Government intentions to
keep public sector prices in line with the
central bank target, and 3) a restricted monetary
policy already adopted to moderate business cost
translation to consumers and wages negotiations.
We estimate CPI and core inflation rates at 3.8
and 3.6 next year.
7
www.cide.edu/analisiseconomico
ECONOMÍA
8
www.cide.edu/analisiseconomico
ECONOMÍA
Monetary Conditions
Since 1Q04 the central bank began its ongoing
cycle of monetary restrictions, policy that has
coordinated since June04 with the Fed own cycle
of monetary restrictions in the US. Banxico has
increased his corto in twelve occasions the
last one was on March 23. As a result of this,
monetary conditions have turned quite restrictive
as real USDMXN has fallen, expected real interest
rates hiked and domestic-yield curve flattened.
Until now, due to the lag with which monetary
restrictions affects aggregate demand, the
restricted monetary policy has had a negligible
effect on economy growth but beginning on 2H05
they will weight in the economy growth
deceleration. We consider the actual stance of
monetary policy restricted enough, and expect
Banxico to look on 2H05 for an opportunity to
decouple his monetary policy from the FED, so
monetary conditions will loosen as short-term
interest rates stabilize and USDMXN rebounds. We
expect USDMXN to close this year at 11.82 vs. his
1Q close of 11.17.
9
www.cide.edu/analisiseconomico
ECONOMÍA
10
www.cide.edu/analisiseconomico
ECONOMÍA
11
www.cide.edu/analisiseconomico
ECONOMÍA
12
www.cide.edu/analisiseconomico
ECONOMÍA