april june 2020...pmi: new orders industrial production june pmi: production july-9.70-13.05 0.74...

August 26, 2020

Quarterly ReportApril – June 2020

Economic and Financial Environment

The COVID-19 pandemic has had a high human toll and caused significant economic damage inMexico as well as in the rest of the world.

Banco de México still faces a complex environment, where the shocks derived from the pandemichave had an impact on economic activity, inflation and the country´s financial conditions, witheffects at different horizons.

Given a sudden increase in risk aversion, domestic financial markets were affected quickly, which

required that various actions be taken to insure an orderly adjustment.

The impact over economic activity and inflation has been materializing and is expected to continuehaving an effect over a longer period of time.

Banco de México has conducted monetary policy seeking to preserve the national currency’spurchasing power and an orderly adjustment of the economy in light of the pandemic.

Within the scope of its possibilities and goals, it has adopted different measures to promote asound development of the financial system and an orderly functioning of the payment systems.

Quarterly Report April-June 2020 1

1

2

3

4

Outline

5

Inflation

Monetary policy

Current situation of the Mexican economy

External conditions

Forecasts and final remarks

2Quarterly Report April-June 2020

After having declined sharply in March and April, the global economy began to show a slight recovery in Mayand June, reflecting the easing of certain lockdown measures and the effects of the stimulus measuresimplemented in systemically important economies.

s. a. / Seasonally adjusted figures. Note: Estimations were used for Q1-2020 calculations. The sample ofcountries used for the calculations represents 85.6% of world GDP measured by purchasing power parity.Forecasts for some sample countries are used in the second quarter. Source: Prepared by Banco deMéxico with data from Haver Analytics, J.P. Morgan and International Monetary Fund (IMF).


-20

-15

-10

-5

0

5

10

20

15

20

16

20

17

20

18

20

19

20

20

World trade

PMI: new orders

Industrialproduction

June

PMI: production

July

-9.70

-13.05

0.741.53

July

Source: CPB Netherlands and Markit.

Activity Indicators Annual % change of 3-month moving average and

deviation from threshold of 50

GDP GrowthQuarterly annualized % change, s. a.

20

05

20

07

20

09

20

11

20

13

20

15

20

17

20

19

-40

-34

-27

-21

-14

-8

-1

6

12Q2-2020

WorldAdvanced

-14.80

-39.97

Emerging excluding China

-36.21

Emerging

0.94

World Economy

85

90

95

100

105

110

115

Ap

r-1

9

Jul-

19

Oct

-19

Jan

-20

Ap

r-2

0

Jul-

20

Oct

-20

Jan

-21

Ap

r-2

1

Jul-

21

Oct

-21

Jan

-22

4

GDP Growth Forecasts for 2020 and 2021Annual % change

Gross Domestic ProductIndex Q1-2019=100

Source: International Monetary Fund (IMF), World Economic Outlook April and June 2020. Source: International Monetary Fund (IMF), World Economic Outlook January, April and June 2020.

Quarterly Report April-June 2020

World

Emerging

Advanced

Q1-2022

World Economy

A large contraction is expected for 2020 and a moderate recovery for 2021. These forecasts, however, aresubject to a large degree of uncertainty.

January 2020

June 2020

2020 2021 2020 2021 2020 2021

World -4.9 5.4 -3.0 5.8 -1.9 -0.4

Advanced -8.0 4.8 -6.1 4.5 -1.9 0.3

United

States-8.0 4.5 -5.9 4.7 -2.1 -0.2

Euro area -10.2 6.0 -7.5 4.7 -2.7 1.3

Japan -5.8 2.4 -5.2 3.0 -0.6 -0.6

United

Kingdom-10.2 6.3 -6.5 4.0 -3.7 2.3

Emerging -3.0 5.9 -1.0 6.6 -2.0 -0.7

Change

compared to

April 2020June 2020 April 2020

WEO

Forecasts

WEO

Forecasts

60

80

100

120

140

160

180

Jan

-18

Ap

r-1

8

Jul-

18

Oct

-18

Jan

-19

Ap

r-1

9

Jul-

19

Oct

-19

Jan

-20

Ap

r-2

0

Jul-

20

5

Selected Metals PricesIndex 01-Jan-2018=100

International Crude Oil PricesUS dollars per barrel

1/ This index follows the prices of aluminum, copper, nickel, zinc and lead.Source: Bloomberg.

Source: Bloomberg.


August

Industrial metals 1/

Iron

Nickel

-40

-20

0

20

40

60

80

100

Jan

-18

Ap

r-1

8

Jul-

18

Oct

-18

Jan

-19

Ap

r-1

9

Jul-

19

Oct

-19

Jan

-20

Ap

r-2

0

Jul-

20

August

Brent

Mexican crude oil mix

After having declined considerably in March and April given the collapse of global economic activity,international commodity prices have increased moderately.

Aluminum

Copper

WTI

Gold


-2

-1

0

1

2

3

4

20

13

20

14

20

15

20

16

20

17

20

18

20

19

20

20

Headline Inflation

1/ Refers to the Personal Consumption Expenditure Price Index (PCE).Source: BEA, Eurostat, Government of Japan Cabinet Office.

-2

-1

0

1

2

3

4

20

13

20

14

20

15

20

16

20

17

20

18

20

19

20

20

Euro area

Japan 3/

United States 2/

JuneJuly

Core Inflation

Euro area

Japan

United States 1/

2/ Refers to the Personal Consumption Expenditure Price Index (PCE)3/ Excludes energy and fresh food and the direct effect of the consumptiontax increase.Source: BEA, Eurostat, Government of Japan Cabinet Office.

Headline and core inflation in advanced economies are clearly below the targets of their respective centralbanks. The recent increase in energy prices has not been able to offset the weakness in core inflation.

Advanced EconomiesAnnual % change

JuneJuly

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

20

12

20

13

20

14

20

15

20

16

20

17

20

18

20

19

20

20

20

21

Central banks of advanced economies have kept interest rates at historically low levels, and have expandedtheir balance sheets to insure an orderly functioning of financial markets. It is foreseen that they willmaintain highly accommodative policy stances, which have been implemented alongside fiscal stimulusmeasures.

0%

20%

40%

60%

80%

100%

120%

140%

20

12

20

14

20

16

20

18

20

20

Reference Rates and Implied Trajectoriesin OIS Curves 1/

%

Balance Sheet of the Main Central Banks % of GDP

1/OIS: Fixed-for-floating swap where the fixed interest rate is theovernight effective reference rate. 2/ Data for the observed federalfunds rate corresponds to the average between the lower andupper bounds of the target range (0.0% - 0.25%).Source: Prepared by Banco de México with Bloombarg data.

Source: Bloomberg Source: Bloomberg


Advanced Economies

End2020

US Federal Reserve 2/

Bank of Japan

European Central Bank

Aug 25, 2020

May 27, 2020

Implied target rate in OIS curve:

Forecasts

End2021

January 20: Human-to-human transmission of COVID-19 is confirmed

US Federal Reserve

Bank of Japan

European Central Bank

10-year Government Bonds Interest Rates%

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

20

12

20

13

20

14

20

15

20

16

20

17

20

18

20

19

20

20

United States

Japan

Euro area

August

98.0

98.5

99.0

99.5

100.0

100.5

101.0

Jan

-18

Jul-

18

Jan

-19

Jul-

19

Jan

-20

Jul-

20

-5

-4

-3

-2

-1

0

1

2

3

4

Jan

-18

Jul-

18

Jan

-19

Jul-

19

Jan

-20

Jul-

20


Higherrisk appetite

August

Global Risk Appetite Index Index

Note: The risk appetite index compares several financial assets, taking intoaccount that in periods of high appetite for riskier assets these tend toregister high returns, while safe assets, such as government bonds of theUnited States, the euro area and Japan, tend to present negative returns.On the other hand, during periods of low risk appetite, the opposite occurs.In this context, the index value refers to the coefficient of a regression ofthe daily yield of 64 assets based on their volatility.Source: Credit Suisse.

After a sudden tightening in global financial conditions following the fiscal, financial and monetary stimuliiimplemented in systemically important economies, and the gradual reopening of economic acivity in variouscountries, said conditions have eased.

TighteningAugust

Stock Markets of Advanced andEmerging Economies

Index 01-Jan-2018=100

70

80

90

100

110

120

130

140

Jan

-18

Jul-

18

Jan

-19

Jul-

19

Jan

-20

Jul-

20

Advanced 1/

Emerging 2/

August

Nota: The MSCI índices of both advanced (MSCI World Index) and emerging (MSCIEmerging Market Index) economies are presented.1/ It includes Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany,Hong Kong, Ireland, Israel, Italy, Japan, Holland, New Zealand, Norway, Portugal,Singapore, Sweden, Switzerland, United Kingdom and the United States.2/ It includes Mexico, Brazil, Chile, China, Colombia, Peru, Czech Republic, Egypt,Greece, Hungary, India, Indonesia, South Korea, Malaysia, Philippines, Poland, Qatar,Russia, South Africa, Taiwan, Thailand, Turkey and the United Arab Emirates. Source:Bloomberg.

Global Financial Conditions Index Index

Note: The index is defined as a weighted average of risk-free interest rates,exchange rates, stock valuations, and credit spreads. With the weightscorresponding to the direct impact of each variable on GDP. It is preparedwith information from 19 advanced economies and 18 emergingeconomies.Source: Goldman Sachs.

Asset Performance of Emerging Countries% and basis points


Since May 1, 2020Since Dec 31, 2019

Note: Interest rates correspond to swap rates for a term of two and ten years, with the exception of Indonesia, Turkey and Mexico, where the government values of said terms are used as a reference.Source: Bloomberg.

After having undergone significant negative effects of the pandemic, financial markets in emerging economieshave improved over the last months.

Region Country Currencies Stocks2Y Interest

rates

10Y Interest

ratesCDS Currencies Stocks

2Y Interest

rates

10Y Interest

ratesCDS

Mexico -16.11% -12.51% -203 -91 49 10.57% 6.80% -73 -87 -121

Brazil -39.45% -12.21% -169 60 126 1.16% 25.90% -45 -86 -88

Chile -5.59% -14.46% -121 -75 22 4.49% 0.99% -19 -43 -40

Colombia -17.11% -28.64% -210 -112 55 3.82% 0.98% -36 -28 -114

Russia -20.66% -1.65% -141 -85 51 2.05% 15.52% -61 -33 -87

Poland 1.36% -10.22% -145 -84 1 10.72% 14.13% -8 11 -8

Turkey -22.94% -3.00% 250 144 266 -5.11% 7.19% 449 275 101

Czech Republic 2.64% -19.62% -178 -81 0 11.20% 4.57% 1 12 -11

Hungary -0.78% -21.79% 37 7 -3 9.10% 4.01% -30 6 -13

China 0.63% 10.84% -11 -72 7 1.60% 17.48% 119 22 -8

Malaysia -2.13% -0.73% -139 -15 16 2.55% 11.14% -43 43 -58

India -4.86% -6.83% -164 -112 18 0.26% 12.34% -25 26 -105

Philippines 3.88% -23.16% -100 -98 15 3.30% 6.60% 2 5 -32

Thailand -5.29% -17.76% -65 -34 14 3.76% 1.95% -15 11 -14

Indonesia -6.54% -16.30% -105 -48 36 0.58% 11.26% -160 -128 -102

Africa South Africa -22.54% -1.99% -292 -76 134 7.56% 13.39% -68 -95 -132

Latin

America

Emerging

Europe

Asia

90

100

110

120

130

140

150

160

Jan

-20

Feb

-20

Mar

-20

Ap

r-2

0

May

-20

Jun

-20

Jul-

20

Au

g-2

0

10

Accumulated Capital Flows 1/

Billion dollars

1/ The sample covers funds used for the buying-selling of stocks and bonds from emergingcountries, recorded in advanced countries. Flows exclude portfolio performance and exchange ratefluctuations. Source: Emerging Portfolio Fund Research.


Nominal Exchange Rate against USDIndex Jan-01-2020=100

Depreciation

Chile

Colombia

Brazil

Mexico

South Africa

August

Peru

Source: Bloomberg.

After considerable capital outflows and foreign exchange adjustments were observed in emerging economiesin March and April, these have been stabilizing.

-100

-50

0

50

100

150

200

1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52

Weeks

2020

Emerging Economies

2015

2019

2016

2018

2017

August 19

1

2

3

4

5

Outline

Inflation

Monetary policy


External conditions



65

70

75

80

85

90

95

100

105

110

20

12

20

13

20

14

20

15

20

16

20

17

20

18

20

19

20

20

70

80

90

100

110

0.6

30

.84

0.6

10

.85

0.2

8-0

.64

0.9

70

.59

0.7

01

.22

0.3

5 1.0

90

.57

1.1

51

.20

-0.2

20

.59

0.3

90

.97

1.1

30

.54

0.2

9-0

.38

1.3

31

.31

-0.0

70

.21

-0.2

50

.19

-0.1

7-0

.23

-0.5

8-1

.16

-17

.05

-20.00

-15.00

-10.00

-5.00

0.00

5.00

60.0

70.0

80.0

90.0

100.0

110.0

20

12

20

13

20

14

20

15

20

16

20

17

20

18

20

19

20

20

In Q2-2020 economic activity was deeply impacted by the effects of the COVID-19 pandemic and the measurestaken to control its spread, especially in April and, to a lesser extent, in May. Some recovery was registered inJune, although still at low levels.

Global Index of Economic ActivityIndex Jan-2020=100, s. a.

Gross Domestic ProductQuarterly % change and index 4Q-2019=100, s. a.

s. a./ Seasonally adjusted figures.Source: Mexico’s National Accounts System (SCNM, for its acronym in Spanish), INEGI.

s. a./ Seasonally adjusted figures.Note: The sum of the components may not add up due to rounding. Source: Mexico’s National AccountsSystem (SCNM, for its acronym in Spanish), INEGI.

Q2-2020


Total

Agricultural andlivestock products

(3.2%)

Industrial (34.2%)

Services(62.7%)

12

June

Levels

Quarterly change

s. a. / Seasonally adjusted figures.Note: Figures in parentheses represent their share in 2013.1/ Includes both wholesale and retail trade.Source: Mexico’s National Accounts System (SCNM, for its acronym in Spanish), INEGI.

60

70

80

90

100

110

120

130

140

20

12

20

13

20

14

20

15

20

16

20

17

20

18

20

19

20

20

Mining (22.3%)

Manufacturing (49.7%) Construction

(23.3%)

Utilities (4.7%) Total

s. a. / Seasonally adjusted figures.Note: Figures in parentheses represent their share in 2013.Source: Monthly Indicator of Industrial Activity, Mexico’s National AccountsSystem (SCNM, for its acronym in Spanish), INEGI.

June

Industrial ActivityIndex Jan-2020=100, s. a.

60

70

80

90

100

110

20

12

20

13

20

14

20

15

20

16

20

17

20

18

20

19

20

20

Trade 1/

(28.8%)

Transportation andInformation

(14.0%)

Finance andreal estate

(23.8%)

Educational andhealth care (9.9%)

June20

30

40

50

60

70

80

90

100

110

120

20

12

20

13

20

14

20

15

20

16

20

17

20

18

20

19

20

20

Public administration

(7.1%)

Professional, management of companies and enterprises(8.9%)

Accommodation andfood services (3.6%)

Arts, entertainment, and recreation (3.8%)

June

IGAE ServicesIndex Jan-2020=100, s. a.

In June industrial activity recovered as a result of the partial opening of a considerable number of activities andthe easing of other restrictions, especially in the manufacturing and construction sectors, although it remainsat low levels.

13

IGAE ServicesIGAE services


70

75

80

85

90

95

100

105

110

0

25

50

75

100

125

150

20

13

20

14

20

15

20

16

20

17

20

18

20

19

20

20

60

70

80

90

100

110

20

13

20

14

20

15

20

16

20

17

20

18

20

19

20

20

60

70

80

90

100

110

20

13

20

14

20

15

20

16

20

17

20

18

20

19

20

20

14

Private ConsumptionIndex Jan-2020=100, s. a.

s. a. / Seasonally adjusted figures.Note: Figures in parentheses represent their share in 2013.Source: Mexico’s National Accounts System (SCNM, for its acronym inSpanish), INEGI.

Domestic Consumption IndicatorsIndex Jan-2020=100, s. a.

s. a. / Seasonally adjusted figures.1/ Seasonal adjustment of ANTAD's actual sales and domestic retail sales of light vehiclesby Banco de México. Source: Prepared by Banco de México with data from the NationalAssociation of Self-Service and Department Stores (ANTAD for its acronym in Spanish), theMonthly Survey on Commercial Companies (EMEC, for its acronym in Spanish), INEGI, andthe Administrative Registry of the Automotive Industry of Light Vehicles, INEGI.

Consumer Goods Importsand Manufacturing SalesIndex Jan-2020=100, s. a.

s. a. / Seasonally adjusted figures. 2/ Current dollar figures3/ Refers to sales from the Monthly Survey on the Manufacturing Industry (EMIM for its acronym inspanish) related to the private consumption of goods. Source: Prepared by Banco de México withdata from PMI Comercio Internacional, S.A. de C.V., SAT, SE, Banco de México and INEGI.Commercial Balance of Goods of Mexico. SNIEG. Information of National Interest and Banco deMéxico with information from the Monthly Survey of the Manufacturing Industry (EMIM).

May

Imported goods (10%)

Domestic services (45%)

Domestic goods (45%)

Indicators related to private consumption suggest a severe damage to this aggregate, both in April and inMay, followed by a slight recovery in June.

Retail income

Retail sales of lightvehicles 1/

ANTAD sales 1/

JuneJune

Total

July

Manufacturing sales associated with national assets 3/

Imports of non-oil non-automotive consumer

goods 2/


40

60

80

100

120

140

160

180

200

20

13

20

14

20

15

20

16

20

17

20

18

20

19

20

20

40

50

60

70

80

90

100

110

120

130

140

20

13

20

14

20

15

20

16

20

17

20

18

20

19

20

20

70

80

90

100

110

120

130

20

13

20

14

20

15

20

16

20

17

20

18

20

19

20

20

15

InvestmentIndex Jan-2020=100, s. a.

Real Value of ConstructionOutput by Sector 1/

Index Jan-2020=100, s. a.

s. a. / Seasonally adjusted figures.Note: Figures in parentheses represent their share in 2019.1/ Seasonally adjusted by Banco de México, except for the total series.Source: Prepared by Banco de México with data from ENEC, INEGI.

s. a. / Seasonally adjusted figures.Note: Figures in parentheses represent their share in total in 2013.Source: Mexico’s National Accounts System (SCNM, for its acronym inSpanish), INEGI.

Imports of Capital Goods 2/


s. a. / Seasonally adjusted figures.2/ current dollar figures.Source: Prepared by Banco de México with data from PMI ComercioInternacional, S.A. de C.V., SAT, SE, Banco de México and INEGI. CommercialBalance of Goods of Mexico. SNIEG Information of National interest.

June

There was a deepening of the negative trend that gross fixed investment has been showing since 2018, andduring the April-May period it registered its lowest level in twenty years, with significantly monthly declinesin all of its components.

May

Domestic machinery and

equipment (15.4%)

Total

Construction (61.4%)

June

Imported machinery and equipment

(23.2%) Public (37.7%)

Private residentialhousing (20.3%)

Private (62.3%)

Private excl. residential housing (42.1%)

Total


60

70

80

90

100

110

20

13

20

14

20

15

20

16

20

17

20

18

20

19

20

20

40

50

60

70

80

90

100

110

20

13

20

14

20

15

20

16

20

17

20

18

20

19

20

20

10

20

30

40

50

60

70

80

90

100

110

20

13

20

14

20

15

20

16

20

17

20

18

20

19

20

20


In June, manufacturing exports as well as total imports partially reversed the decline observed in the previoustwo months, although in both cases they remain at low levels.

Automotive and Non-automotive By Destination

Non-Oil Imports 1/


s. a. / Seasonally adjusted figures.Note: Figures in parentheses represent their share in total in Jan-2020.Source: Prepared by Banco de México with data from PMI Comercio Internacional, S.A. de C.V., SAT, SE, Banco de México, INEGI. Commercial Balance of Goods of Mexico. SNIEG.Information of National Interest.

s. a. / Seasonally adjusted figures. 1/ Figures in current US dollars.Source: Prepared by Banco de México with data from PMI Comercio Internacional,S.A. de C.V., SAT, SE, Banco de México, INEGI. Commercial Balance of Goods ofMexico. SNIEG. Information of National Interest.

Manufacturing ExportsIndex Jan-2020=100, s. a.

June June June

Automotive (37.3%)

Non-automotive (62.7%)

Total

Total

United States (82.6%)

Rest of the world (17.4%)

84.580.7

62.5

80.7

64.5

90.3


It is estimated that in Q2-2020, the current account balance declined considerably compared to the onereported in Q2-2019.

-10,000

-8,000

-6,000

-4,000

-2,000

0

2,000

4,000

6,000

8,000

10,000

12,000

20

00

20

02

20

04

20

06

20

08

20

10

20

12

20

14

20

16

20

18

20

20

Trade BalanceUSD million

-5

-4

-3

-2

-1

0

1

2

20

00

20

02

20

04

20

06

20

08

20

10

20

12

20

14

20

16

20

18

20

20

Current Account% of GDP

Source: Banco de México and INEGI Source: SAT, SE, Banco de México, INEGI. Mexico’s Merchandise Trade Balance. SNIEG. Information ofnational interest.

-0.4

-0.9-0.7-0.8

-1.7

-2.3-2.6

-0.3

-2.1-1.8

-2.3-2.7

-1.9

-2.5

-1.6

-1.0

-0.5

-0.9

-1.5

-0.9

Q2-2020

Non-oil

OilTotal

Q2-2020

Annual data

Current account

60

70

80

90

100

110

20

06

20

08

20

10

20

12

20

14

20

16

20

18

20

20

3

6

9

12

15

18

21

24

27

30

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18

20

19

20

20


Labor conditions in the formal and, especially, in the informal sector, deteriorated considerably as aresult of the COVID-19 pandemic and the measures to contain it.

IMSS-insured Jobs, Total IGAE and Employed PopulationIndex 2020=100, s. a.

Underemployment Rate %, s. a.

s. a. / Seasonally adjusted figures.1/ Refers to permanent and temporary urban workers. Seasonal adjustment by Banco de México.e/ Estimation from the April.June 2020 ETOE 2020.Source: Prepared by Banco de México with data from IMSS and INEGI. (SCNM, ENOE and ETOE).

s. a. / Seasonally adjusted figures. The seasonal adjustment was made based on the seasonal adjustmentmodels used by INEGI.Source: Prepared by Banco de México with data from ENOE and ETOE, INEGI.

JulyJune

IMSS-insured Jobs 1/

Total IGAE

Employed population

QT-2020 e/

June

45

47

49

51

53

55

57

59

61

63

20

08

20

10

20

12

20

14

20

16

20

18

20

20

2.5

3.0

3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18

20

19

20

20


Employment declined significantly in April, associated with the considerable number of individuals whoexited the labor force and a relatively modest increase in the unemployment rate. Insofar as certainrestrictions on firms’ operations and on population’s mobility have eased, an improvement was observedin June.

National Labor Participation Rate 2/

%, s. a.National Unemployment Rate

%, o. s.

s. a. / Seasonally adjusted and trend data.2/ Percentage of Economically Active Population (EAP) with respect to the population of 15 years and older.Source: Prepared by Banco de México with data from ENOE and ETOE, INEGI.

o. s./ Original series1/ The April, May and June 2020 figures are those released in the Telephone Survey of Occupation andUnemployment (ETOE, for its acronym in Spanish), and are not fully comparable with the figures of the ENOE.They are presented only as a reference.Source: Prepared by Banco de México with data from ENOE and ETOE, INEGI.

June

ENOE Unemployment Rate

ETOE 1/

Unemployment Rate

June


In Q2-2020 slack conditions widened significantly. Output gap estimates for Q2-2020 are significantly belowthose registered in 2009.

0

5

10

15

20

25

30

35

-28

-24

-20

-16

-12

-8

-4

0

4

8

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18

20

19

20

20

Output Gap Estimate 1/

% of potential output, s. a.

-10

-8

-6

-4

-2

0

2

4

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18

20

19

Monthly Slack Indicators: Main Component byIndicators Frequency 3/

%

s. a. / Seasonally adjusted data.1/ Output gap estimated with a tail-corrected Hodrick-Prescott filter; see “Inflation Report April – June 2009”,Banco de México, p. 74.2/ Output gap confidence interval calculated with a method of unobserved components.Source: Prepared by Banco de México with data from INEGI and Banco de México.

3/ Main Indicators constructed using CCM methodology; see Banco de México (2018), “Quarterly Report, October-December 2017”, p.47. Monthly slack indicators are constructed with the main component of sets of series whichincludes 11 indicators. Slack indicators of consumption, economic activity, aggregate demand, labor market anddemand conditions in the lending market are based on the first main component of sets of series which includes 6, 4,3 and 6 indicators, respectively.Source: Prepared by Banco de México with data from INEGI and Banco de México.

20

20

GDP 95% confidenceInterval 2/

Q2-2020June

IGAE

May

-0.27

-7.90

Monthly indicator

Consumption

Demand conditions inthe lending market Labor market

-9.04-8.34

1

2

3

4

5

Outline

Inflation

Monetary policy


External conditions



-1

0

1

2

3

4

5

6

7

8

20

15

20

16

20

17

20

18

20

19

20

20

-3

-1

1

3

5

7

9

11

13

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18

20

19

20

20

Consumer Price Index

1/ Since 2003, a permanent inflation target of 3%, with a variability interval of +/-1%, was established for headline inflation.Source: Banco de México and INEGI.


1F August

Annual Incidences in percentage points 2/

2/ The sum of inflation’s components may not add up due to rounding.Source: Prepared by Banco de México with data from INEGI.

Annual % change 1/

1F August

22

The behavior of inflation reflects both downward and upward pressures, resulting from the shocks derived fromthe COVID-19 pandemic. Annual headline inflation in April was 2.15%, the second lowest on record. Since then ithas been increasing, reaching 3.99% in the first fortnight of August.

Headline

Non-core

Variability interval Core

Services

Merchandise

Non-core

Headline

3.93

4.183.99

1.01

0.88

2.09

3.99

-9

-6

-3

0

3

6

9

12

15

20

16

20

17

20

18

20

19

20

20

-30

-20

-10

0

10

20

30

40

50

20

16

20

17

20

18

20

19

20

20


Between Q1 and Q2-2020 non-core inflation declined. In April it lay at an historically low level of -1.96% giventhe sharp decline in energy prices, albeit these have been increasing in the following months, thus exertingpressure on non-core inflation (4.18% in the first fortnight of August).

-15

-10

-5

0

5

10

15

20

25

30

20

16

20

17

20

18

20

19

20

20

Agricultural and Livestock ProductsAnnual % change

1/ In certain cases, the sum of inflation’s components may not add up dueto rounding. 2/ Includes LP gas and natural gas.Source: Calculated by Banco de México with data from INEGI.

Source: Banco de México and INEGI. Source: Banco de México and INEGI.

Total

Fruits and vegetables

1F August

LP gas

Natural gas Gasoline

Energy products

1F August

Selected Energy Price IndexesAnnual % change

Annual incidences 1/

Percentage points

1F August

Livestock products

Non-core Price Subindex

Agricultural andlivestock

Domestic gas 2/

Gasoline

Electricity

Governmentauthorized

prices

Non-core

24

Core inflation has been affected by the pandemic, registering upward pressures in merchandise prices anddownward pressures in those of services, with higher annual rates of change.

Core Price Subindex Merchandise Services

Source: Banco de México and INEGI. Source: Banco de México and INEGI. Source: Banco de México and INEGI.

Core Price SubindexAnnual % change

0

1

2

3

4

5

6

7

8

20

16

20

17

20

18

20

19

20

20

0

1

2

3

4

5

6

7

8

20

16

20

17

20

18

20

19

20

20

Total

Foods, beveragesand tobacco

Non-foodmerchandise

1F August 1F August

Services

Merchandise

Core

0

1

2

3

4

5

6

7

20

16

20

17

20

18

20

19

20

20

Education

Housing

Other services

Total

1F August


25

April 2020

Core Inflation and ComponentsMonthly % change s. a.

s. a. / Seasonally adjusted figures.Source: Prepared by Banco de México with INEGI data.

June 2020 July 2020May 2020 1F August 2020Average 2010-2019Monthly data

The pandemic has generated significant shocks to inflation. To the upside: in food merchandise prices, andlater, in most non-food merchandise prices; to the downside: in services prices.

Core

Merchandise

Food merchandise

Sugar products

Corn products

Sausages

Wheat products

Soy products

Dairy products

Rest of food merchandise

Non-food merchandise

Cars

Household app. and furniture

Clothing and footwear

Hygiene and care

Medicines

Rest of non-food merchandise

Services

Housing

Education

Rest of services

Tourism services

Other services

-2.5 -1.5 -0.5 0.5 1.5 2.5

-2.5 -1.5 -0.5 0.5 1.5 2.5

-2.5 -1.5 -0.5 0.5 1.5 2.5

-2.5 -1.5 -0.5 0.5 1.5 2.5

-2.5 -1.5 -0.5 0.5 1.5 2.5

-2.5 -1.5 -0.5 0.5 1.5 2.5

-2.5 -1.5 -0.5 0.5 1.5 2.5

-2.5 -1.5 -0.5 0.5 1.5 2.5

-2.5 -1.5 -0.5 0.5 1.5 2.5

-2.5 -1.5 -0.5 0.5 1.5 2.5


-3

-1

1

3

5

7

9

11

13

Jul-

17

No

v-1

7

Mar

-18

Jul-

18

No

v-1

8

Mar

-19

Jul-

19

No

v-1

9

Mar

-20

Jul-

20


The pandemic has had a significant impact on inflation in different countries, both advanced and emerging.Upward pressures have been observed on food prices and downward pressures on services prices.

Consumer Price Index Weight%

Foods 1/

1/ Includes processed and unprocessed foods.Source: Prepared by Banco de México with data from INEGI, OECD and Haver Analytics.

Services

Consumer Price Indices in Different CountriesAnnual % change

0

1

2

3

4

5

6

7

Jul-

17

No

v-1

7

Mar

-18

Jul-

18

No

v-1

8

Mar

-19

Jul-

19

No

v-1

9

Mar

-20

Jul-

20

Mexico

United Kingdom

Canada

Colombia

Chile United States

Mexico

United Kingdom

Canada

Colombia

Chile

United States

Country Foods 2/ Services

United States 7 64

Canada 11 51

United Kingdom 8 59

Mexico 26 42

Colombia 15 48

Chile 19 44

March March

2/ Includes processed and unprocessed foods.Source: Prepared by Banco de México with data from OECD and Haver Analytics

1

2

3

4

Outline

5

Inflation

Monetary policy


External conditions




The Governing Board considered the risks for inflation, economic activity and financial

markets derived from the COVID-19 pandemic, which pose significant challenges for

monetary policy and the economy in general.

The Board announced additional measures to promote the well-functioning of financial

markets, strengthen credit provision, and provide liquidity for the sound development of the

financial system.

Banco de México continued to conduct monetary policy in an environment of high uncertainty.

May50bp reduction

to 5.5%

June50bp reduction

to 5.0%

August50bp reduction

to 4.5%

April(unscheduled decision)

50bp reductionto 6.0%

It considered that the challenges for monetary policy posed by the pandemic include both

the significant impact on economic activity and a financial shock.

It considered the risks for inflation, economic activity and financial markets. In this context,

the referred decisions were made based on the foreseen scenarios and considering the room

for maneuver that on balance these provide to monetary policy.

In the August decision, it stated that looking ahead, the available room for maneuver will

depend on the evolution of the factors that have an incidence on the inflation outlook and

its expectations, including the effects that the pandemic might have on both.

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

20

15

20

16

20

17

20

18

20

19

20

20

1/The data shown up to January 20, 2008 corresponds to the overnight interbank interest rate (policy rate).Source: Prepared by Banco de México with INEGI data.

From April 2020 to date the Governing Board lowered the reference rate by 200 basis points, taking the targetfor the overnight interbank interest rate to its current level of 4.5%.

2

3

4

5

6

7

8

9

10

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18

20

19

20

20

Target for the Overnight Interbank Interest Rate and Headline Infation 1/

%, annual % change


Target for the overnightinterbank interest rate

(policy rate)

August

Headline inflation

1F August

Inflation target

Short-term Ex-ante Real Rate and Estimated Range forthe Short-term Neutral Real Rate in the Long Term 2/

%August

2/ The short-term ex-ante real rate is constructed using the Target for the OvernightInterbank Interest Rate and 12-month inflation expectations from Banco de México’s Survey.The dotted line corresponds to the midpoint of the range for the short-term neutral real ratein the long term, which is now between 1.8 and 3.4%. Source: Banco de México.

Short-term ex-ante real rate

Short-term neutral real raterange in the long term

2.0

2.5

3.0

3.5

4.0

4.5

5.0

20

14

20

15

20

16

20

17

20

18

20

19

20

20

2.0

2.5

3.0

3.5

4.0

4.5

5.0

Jan

-18

Ap

r-1

8

Jul-

18

Oct

-18

Jan

-19

Ap

r-1

9

Jul-

19

Oct

-19

Jan

-20

Ap

r-2

0

Jul-

20

Note: Breakeven Inflation and Inflation risk is calculated as the differencebetween nominal and real long-term interest rates.Source: Estimated by Banco de México with Valmer and PiP data.

For the End of 2020 and 2021 Medium- and Long-term

Breakeven Inflation and Inflation Risk

Implied in Bonds

%

Source: Banco de México’s Survey of Private Sector Forecasters. Source: Banco de México’s Survey of Private Sector Forecasters.

Headline

Core

July

20-day moving average

Breakeven inflationimplied in 10-year bonds

August2.0

2.5

3.0

3.5

4.0

4.5

5.0

20

14

20

15

20

16

20

17

20

18

20

19

20

20

Next 5-8 years

Next 4 years

Inflation target

July

Variability interval(upper limit)

30

Inflation ExpectationsMedian, %

Headline inflation expectations for the end of 2020 have increased given the adjustments exhibited byinflation over the last months. Medium- and long-term expectations remained relatively stable, althoughbreakeven inflation and inflationary risk exhibited volatility.

Headline

Core

2020

2021


0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0

5

10

15

20

25

30

35

40

45

50

No

v-1

8

Jan

-19

Mar

-19

May

-19

Jul-

19

Sep

-19

No

v-1

9

Jan

-20

Mar

-20

May

-20

Jul-

20

Stock markets2/

FX markets 3/

18

19

20

21

22

23

24

25

26

27

No

v-1

8

Jan

-19

Mar

-19

May

-19

Jul-

19

Sep

-19

No

v-1

9

Jan

-20

Mar

-20

May

-20

Jul-

20

31

After being affected by the financial shock in March, domestic financial markets began to recover, althoughthey have not returned to pre-pandemic conditions and have continued to register bouts of volatility.

Market Indicators that Measure Domestic Sovereign Credit Risk/1

Basis points

Volatility in Mexican Financial Markets%

Nominal Exchange Rate 5/

Pesos per US dollar

1/ Refers to 5-year Credit Default Swaps (CDS).Source: Bloomberg.

2/ Refers to the volatility index of S&P of the Mexican Stock Exchange.3/ Refers to volatility implied in 1-month Mexican peso options.4/ Refers to a standard deviation of a 30-day moving window of 10-year interestrates in Mexico.Source: Bloomberg and Proveedor Integral de Precios (PiP).

5/ Observed exchange rate refers to the daily FIX exchange rate. Figuresaside analysts’ expectations correspond to the medians of Banco deMéxico’s survey for July and the Citibanamex survey for August 20, 2020.Source: Banco de México and Citibanamex.

August

Fixed-income markets4/

Observed exchange rate

21.97

August0

100

200

300

400

Jan

-19

Mar

-19

May

-19

Jul-

19

Sep

-19

No

v-1

9

Jan

-20

Mar

-20

May

-20

Jul-

20

August

Chile

Colombia

Brazil

Mexico

Thailand

Peru

Analysts’ expectations 2021 Banxico survey 22.50

Analysts’ expectations 2021 Citibanamex survey 22.70

Analysts’ expectations 2020 Citibanamex survey 22.80Analysts’ expectations 2020 Banxico survey 22.65


40

215

121

62

121

68

4.0

5.0

6.0

7.0

8.0

9.0

10.0

11.0

1D

3M

6M 1Y

2Y

3Y

5Y

10

Y

20

Y

30

Y

32

From the end of March to date the yield curve shifted downwards in all of its nodes. In particular, short termyields reflected the monetary policy adjustments, while medium- and long-term yields reflected theimprovement in global risk appetite and contained inflationary risk premia.

4

5

6

7

8

9

10

Jan

-19

Mar

-19

May

-19

Jul-

19

Sep

-19

No

v-1

9

Jan

-20

Mar

-20

May

-20

Jul-

20

Government Bond Interest Rates In Mexico%

Yield Curve of Mexico%

Source: Proveedor Integral de Precios (PiP). Note: The gray lines refer to the daily yield curves since December 31, 2019.Source: Proveedor Integral de Precios (PiP).

1 day

10 years

30 years

3 years

August

Aug 25, 20

Mar 31, 20

Mar 19, 20

Dec 31, 19

August


-2.0

2.0

6.0

10.0

14.0

18.0

Jan

-19

Mar

-19

May

-19

Jul-

19

Sep

-19

No

v-1

9

Jan

-20

Mar

-20

May

-20

Jul-

20

Source: Bloomberg.


-0.2

0.1

0.4

0.7

1.0

1.3

Jan

-19

Mar

-19

May

-19

Jul-

19

Sep

-19

No

v-1

9

Jan

-20

Mar

-20

May

-20

Jul-

20

Volatility-adjusted Spreads between US 1-year Interest Rates and those of Emerging

EconomiesIndex

August

BrazilChile

Poland

Turkey

Mexico

Colombia

South Africa

Interest Rate Spreads between US 10-year Interest Rates and those of Emerging Economies

Percentage points

Note: Estimates calculated with the spread implied in 1-year foreign exchange forwards, adjustedfor the implied volatility in the same term. Source: Prepared by Banco de México with data fromBloomberg.

Chile

Poland

ColombiaMexico

South Africa

August

After having declined significantly in March, interest rate spreads have remained relatively stable.

Brazil

Turkey

1

2

3

4

5

Outline

Inflation

Monetary policy


External conditions



The evolution of the COVID-19 pandemic is still underway, at both global and domestic levels and, thus,there is still a high level of uncertainty around any forecast of economic activity in Mexico:

Uncertainty prevails as to the duration of the pandemic, which, in turn, implies uncertainty about theduration and depth of the lockdown and social distancing measures that will be necessary, and of theirmedium- and long-term repercussions on the economy.

The risk of additional outbreaks continues.

The term for the development of an effective treatment or a vaccine is still uncertain.

Economic Activity Outlook

35

In the current juncture, it is not convenient to present a central baseline scenario of economic activityforecasts in Mexico, as it could imply a higher level of precision than the one that the current environmentor available information would allow to attain.

The consideration of contemplating different scenarios, as in the previous Quarterly Report, continues tobe relevant in order to have a broad outlook on the possible performance of GDP in 2020 and 2021.


Following the same approach of the previous Quarterly Report, the presented scenarios differ in terms of therate of recovery of economic activity.

I12

II III IV I13

II III IV I14

II III IV I15

II III IV I16

II III IV I17

II III IV I18

II III IV I19

II III IV I20

II III IV I21

II III IV72

75

78

81

84

87

90

93

96

99

102

105

GDP Growth Scenarios%

Increase in Number ofIMSS-insured Jobs

Thousands

Current Account % of GDP

36

Estimates of Mexico's GDPBase indices Q4-2019 = 100, s. a.

Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q32012 2013 2014 2015 2016 2017 2018 2019 2020 2021

2020 Q2

Observed

Deep V-shaped scenario

Deep U-shaped scenario

V-shaped scenario

s. a. / Seasonally adjusted series. Note: Part of the difference in the new trajectories with respect to the previous ones is due to thechange in the official seasonal adjustment model applied by INEGI. In the Current Report, forecastsbegin in Q3-2020 and in the previous report, in Q2-2020.Source: Prepared by Banco de México with INEGI data.

Current Report

Previous Report

Previous Report Current Report Previous Report Current Report

V-shaped -4.6 -8.8 4.0 5.6

Deep V-shaped -8.8 -11.3 4.1 2.8

Deep U-shaped -8.3 -12.8 -0.5 1.3

2020 2021

Report 2020 2021

Previous -1,400 to -800 -200 to 400

Current -1,100 to -750 100 to 450

Report 2020 2021

Previous -1.5 to -0.3 -1.8 to -0.5

Current -0.6 to 0.5 -1.5 to -0.2


Economic Activity Forecasts

That social distancing measures are extended or become tighter.

Additional episodes of financial volatility.

That the adopted relief measures are not effective.

That the pandemic’s repercussions on the economy are more permanent.

That sovereign and Pemex’s credit ratings are further downgraded.

That the weakness of aggregate demand components persists.

Risks to Growth

That the pandemic dissipates earlier than expected, possibly as a result of new treatments or theimplementation of an effective vaccine.

That the stimuli provided are effective in offsetting the effects of the pandemic and to support globaleconomic recovery.

That the entry into force of USMCA fosters greater-than-expected investment.

37

To the upside

To the downside


0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0

7.5

8.0

Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0

7.5

8.0

Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1

Annual Headline Inflation%

1/ Quarterly average of annual headline and core inflation. If inflation locates at the center of these intervals, the trajectories would be those reported in the boxes inside the graphs. 2/ Forecast since August 2020. 3/ Forecast since May 2020. Note: Blue bars are presented to indicatethe minimum and maximum levels that inflation would reach in the estimated scenarios for each quarter. Uncertainty is represented by the shaded area in red. The next four and six quarters are shown in vertical dotted lines as of the third quarter of 2020, that is, the third quarter of2021 and the first quarter of 2022, respectively; periods in which the monetary policy transmission channels fully operate. The core and headline inflation trajectories were estimated based on the evolution of the macroeconomic variables for the three scenarios presented in thisreport. Source: Prepared by Banco de México with INEGI data.


Q32022

Q12022

For headline inflation: The recent pressures generate a slight and temporary increase in the foreseen short-term trajectory.Within the 12-24 month horizon, it is anticipated to lie at similar levels, around 3%.

For core inflation: The forecasts remain at levels close to those in the previous Quarterly Report, although with a slightupward adjustment starting from Q2-2021. The 12-24 month forecast is expected to lie at around 3%.

Fan Charts1/

Annual Core Inflation%

Intermediate scenario: Previous Report

Scenarios

Intermediate scenario: Current Report

Q32022

Q12022Intermediate scenario: Previous Report

Scenarios

Intermediate scenario: Current Report

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2

Current 2/ 3.4 2.8 3.9 3.7 3.6 4.2 3.1 2.9 2.8 2.8

Previous 3/ 3.4 2.7 3.5 3.5 3.4 4.0 3.2 3.0 2.9

2020 2021 2022

2015 2016 2017 2018 2019 2020 2021 2022 2015 2016 2017 2018 2019 2020 2021 2022

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2

Current 2/ 3.7 3.6 3.9 3.8 3.8 3.5 3.0 2.8 2.7 2.7

Previous 3/ 3.7 3.7 3.8 3.8 3.7 3.2 2.7 2.6 2.5

2020 2021 2022

A greater-than-expected impact of a wider negative output gap.

Lower inflation pressures at the global level.

A lower demand for certain goods and services, in light of social distancing measures and concerns aboutcontagion.

That the exchange rate is below the anticipated level.

That the recent increases in energy prices are reversed.

39

To the downside


Additional episodes of exchange rate depreciation.

Logistical problems and others related with the supply of certain goods and services, and higher costsassociated with the sanitary measures.

That the relative demand for certain goods increases in a context of the health emergency.

A higher persistence of core inflation.

Higher increases in energy prices.

To the upside

Risks to Inflation Outlook within the Forecast HorizonConsidering the shocks to inflation, the balance of risks for its forecast remains uncertain.

Final Remarks

The Governing Board will take the necessary actions, on the basis of incoming information andconsidering the deep impact on economic activity, as well as the evolution of the financial shock, so thatthe reference rate is consistent with the orderly and sustained convergence of headline inflation to Bancode México’s target, during the time frame in which monetary policy operates.

Looking ahead, the available room for maneuver will depend on the evolution of the factors that have anincidence on outlook for inflation and its expectations, including the effects that the pandemic may haveon both factors.

Perseverance in strengthening the macroeconomic fundamentals and adopting the necessary actions,regarding both monetary and fiscal policies, will contribute to a better adjustment of domestic financialmarkets and of the economy as a whole.

Likewise, it remains necessary to continue working on correcting the institutional and structural problemsthat have led to low investment levels and have prevented the country from increasing its productivity.


Effects of Lockdown Measures on Global Economic Activity

41

Annex – Boxes


1

2

3

4

5

6

7

The COVID-19 Pandemic and Economic Activity

Evolution of Monetary and Credit Aggregates in Different Economies

The Adoption of Special Accounting Criteria and their Effects on Bank’s Credit Portfolio to the Non-financial Private Sector

Greater Volatility of Inflation and its Expectations in the Context of the COVID-19 Pandemic

Developments in Inflation in Different Countries in the Context of the COVID-19 Pandemic

Evolution of Capital Flows and Risk Aversion

april june 2020...pmi: new orders industrial production june pmi: production july-9.70-13.05 0.74...

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