As the third quarter of 2009 comes to a close, the Mexican economy remains severely battered. The latest INEGI data indicate that the second quarter of 2009 brought with it an annual GDP decrease, in real terms, of nearly 10.3 percent. The current consensus outlook calls for the light at the end of the tunnel to appear in 2010. In spite of this austere outlook, the financial system in Mexico has fared better than it did in prior recessions and the economy seems poised for growth once exports recover. The consensus outlook for real gross domestic product (GDP) calls for a noticeably sharp decline in 2009 of 7.1 percent. Relative to the consensus from last quarter, that represents a sharp downward revision. Individual panelist forecasts range from a drop of 6.5 percent to a steeper decline of 8.2 percent. An important source of the more pessimistic outlook is private consumption. Compared with the previous quarter, Mexican consumers are expected to reduce purchases by 6.9 percent, more than double the rate of decline expected three months ago.Mexico, Macroeconomic Forecast, Consensus Survey

Fullerton, Thomas M., Jr.

Molina, Angel L., Jr.

English

Research Papers in Economics

Mexican Monetary Policy: Between a Rock and a Hard Place 
The  Mexican  central  bank  faces  one  of  the  toughest  environments  to  conduct  monetary  policy  as 
inflationary pressures, while abating, continue to remain above the institution’s target of 3.0% +/- 1.0%, 
even though the economy is suffering the worst contraction since the Great Depression of the 1930s.  In 
fact, as the world economy entered one of the worst periods since the Great Depression, inflationary 
pressures were still building in the Mexican economy as food and petroleum prices increased until July of 
last year.  That said, the Mexican inflation rate went from 3.72% in February of 2008 to 6.53% by the end 
of the year.   
Starting in January of 2009, when the rate of inflation began to trend downward, the central bank began its 
campaign to lower interest rates.  However, the economy was already experiencing the worst recession 
since the 1930s and little could be done at that time.  This does not mean that the failure to react back in 
September of 2008, when the U.S. Federal Reserve started to lower the Federal Funds rate, would have 
made any difference for the Mexican economy.  But it’s clear that domestic inflationary concerns were at 
the top of the agenda for central bank officials in Mexico while not so much for central bankers in the U.S.  
In fact, the different reaction of prices in the U.S. and Mexico is a clear indication that the rate of inflation 
in Mexico is much more resilient than its U.S. counterpart.  By July of 2009, the rate of inflation in Mexico 
was still high at 5.4%, while the rate in the U.S. was -2.1%.  Consumer prices in the U.S. were at 5.6% in July 
of 2008.  This means that the 3.0% inflation target established by the Mexican central bank may not be 
sensible in a country where structural issues prevent the rate of inflation from falling towards the target 
even during strenuous economic circumstances.   
Of course, for the central bank, changing the target for the rate of inflation is a very difficult proposition, 
since they’ll likely face a serious issue with the resetting of inflationary expectations across the economy 
that could trigger even higher future inflation.  Thus, the Mexican central bank is between a rock and a 
hard place, having established a target that is, under normal circumstances, impossible to achieve while at 
the same time trying to convince economic agents that the target is feasible.   
Having a higher target for inflation could have allowed the Mexican central bank to start lowering interest 
rates before January of this year.  While it is clear that this may not have been enough to prevent the 
collapse in economic activity that ensued, it may have allowed domestic consumption to partially fill the 
consumption gap opened due to the collapse in foreign consumption.   
This latest crisis shows the limitations faced by monetary policy in a highly open and globalized world when 
faced with a collapse in demand from your most important trade partner.  This time around, the Mexican 
crisis was not triggered by domestic events, as was the case during the Tequila Crisis of 1994-1995.  During 
that downturn, domestic consumption collapsed but foreign consumption remained strong, preventing an 
even more serious crisis.  During the current meltdown, foreign demand collapsed and domestic demand 
did not step up to the plate and save the day.   
Taking  all  of  this  into  consideration,  the  central  bank  of  Mexico  did  not  have  much  of  a  choice.  
Furthermore, this response shows the clear differences in mandates between both institutions north and 
south of the border.  The Mexican central bank mandate is almost singular in nature, being entrusted with 
keeping  inflation  down.  The  U.S.  Federal  Reserve  must  make  a  value  judgment  between  different 
objectives such as price stability, full employment, economic growth, and financial stability among others 
—Dr. Eugenio J. Alemán ,  Wells Fargo Bank 
 
 
 
 
3
rdQuarter 2009 
American Chamber México 
Dr. Deborah L. Riner 
Wells Fargo Bank 
Dr. Eugenio J. Alemán 
Center for Economic 
Forecasting of Mexico 
JP Morgan Chase Bank 
Dr. Alfredo Thorne 
BBVA Bancomer 
Octavio Gutiérrez Engelman 
Pedro Uríz                                
Cecilia Posadas 
Universidad Autónoma de 
Ciudad Juárez 
Dra. Patricia Barraza de Anda 
Dra. Lisbeily Domínguez 
 
El Colegio de la Frontera 
Norte 
Dr. Eduardo Mendoza Cota                   
Dr. Eliseo Díaz 
Instituto Tecnológico y de 
Estudios Superiores de 
Monterrey 
Dr. Jorge Ibarra Salazar 
Universidad Autónoma de 
Coahuila                                         
Dr. Alejandro Dávila Flores 
 Mexico Consensus Economic Forecast 
3rd Quarter Summary 
 
The Trough Deepens 
 
As the third quarter of 2009 comes to a close, the Mexican economy remains severely battered.  The latest INEGI data indicate that 
the second quarter of 2009 brought with it an annual GDP decrease, in real terms, of nearly 10.3 percent.  The current consensus 
outlook calls for the light at the end of the tunnel to appear in 2010.  In spite of this austere outlook, the financial system in Mexico 
has fared better than it did in prior recessions and the economy seems poised for growth once exports recover. 
 
The consensus outlook for real gross domestic product (GDP) calls for a noticeably sharp decline in 2009 of 7.1 percent.  Relative to 
the consensus from last quarter, that represents a sharp downward revision.  Individual panelist forecasts range from a drop of 6.5 
percent to a steeper decline of 8.2 percent.  An important source of the more pessimistic outlook is private consumption.  Compared 
with the previous quarter, Mexican consumers are expected to reduce purchases by 6.9 percent, more than double the rate of 
decline expected three months ago. 
Fiscal stimulus efforts in Mexico will likely continue in response to a struggling national economy.  Given this, the consensus forecast 
calls for an increase in government consumption of 2.3 percent in 2009, a projection that is basically unchanged from last quarter.  
Confidence in Mexican business performance will likely remain weak throughout the remainder of the same twelve-month period.  
As such, the panelist consensus expects total fixed investment to decline even more sharply than was the case earlier this year.  The 
contraction is now predicted to exceed negative 11 percent, with two panelists calling for declines of 15 percent or worse. 
The pace of U.S business cycle recovery will not be rapid enough to prevent steep double-digit declines in manufactured product 
exports in 2009.  That combines with the sharp fall in petroleum prices to pull down total exports by a whopping 20 percentage 
points according to the consensus.  As other sectors of the Mexican economy continue to falter, Mexican imports of goods and 
services are also likely to shrink by more than 20 percent.  The latter also reflects the loss of consumer purchasing power that 
resulted from the depreciation of the peso during the second half of 2008. 
Five of the nine panelists anticipate consumer price increases of no less than 5.4 percent, while the remainder expect price increases 
ranging from 3.7 to 5.0 percent.  That translates to a consensus rate of 5 percent in 2009 and represents a more optimistic figure 
than what was anticipated last quarter.  Accompanying that change is a consensus exchange rate forecast of 13.39 pesos per dollar, 
also an improvement from three months ago. 
The panel does not anticipate that higher yields will be required for currency market tranquility.  In fact, the consensus outlook calls 
for an 80 basis point drop for 28-day Treasury Certificates (CETES) relative to the forecast from last quarter.  The 5.5 percent rate of 
return currently expected for 28-day CETES is not much higher than the rate of change predicted for the CPI, reflective of the 
modified  central bank policy stance discussed above.   That represents a sharp departure from recent years  when inflationary 
pressures in Mexico were more intense. 
Although the 2009 outlook has worsened, a much more solid recovery is now anticipated for 2010.  GDP is forecast to display an 
increase of 2.3 percent, outpacing the moderate 1.3 percent clip projected last quarter.  Private consumption is also projected to 
recover in 2010.  A less noticeable increase in government spending, however, is expected by the forecast panel.  In this economic 
climate, enhanced business conditions are projected to strengthen fixed investment.  As these trends unfold, Mexico’s imports and 
exports will likely accelerate, but there are wide ranging differences among the individual forecasts for these items.  In spite of the 
acceleration in overall economic activity, consumer price inflation is expected to continue to decelerate in 2010 and fall to 3.9 
percent.  Over the course of those twelve months, the panelists further anticipate stronger macroeconomic conditions to help the 
Mexican peso to hold steady at 13.38 P/$.  The panel forecast of 5.2 percent for the 28-day CETES rate in 2010 reflects ongoing 
monetary policy accommodation by the central bank. 
 
Thomas M. Fullerton, Jr. and Angel L. Molina, Jr. 
University of Texas at El Paso Border Region Modeling Project 
 
 
 
 
 2009 Mexico Consensus Economic Forecast              Annual Average 
  Annual Percent Change, 2009 from 2008     
  GDP 
Private 
Consumption 
Government 
Consumption 
Total 
Investment  Exports  Imports 
Consumer 
Price Index 
Exchange 
Rate 
CETES 
28 Day 
American Chamber Mexico  -7.4  -8.3  1.1  -11.7  -24.4  -26.4  4.2  13.57  5.4 
JPMorgan Chase Bank  -6.5  n/a  n/a  -25.0  -20.0  -30.0  3.7  13.50  5.4 
BBVA Bancomer  -8.2  -7.9  4.3  -9.7  -20.9  -19.1  5.4  13.50  5.3 
Wells Fargo Bank  -7.2  -8.0  0.7  -10.3  -14.1  -14.6  5.4  13.55  5.4 
Center for Economic Forecasting of Mexico  -7.2  -6.8  -0.5  -11.1  -14.8  -16.5  5.4  13.40  5.4 
UACJ  -6.0  -4.0  -1.0  -3.7  -2.5  -2.0  5.0  13.35  5.8 
ITESM  -7.0  -6.0  0.5  -8.0  -35.0  -25.0  4.5  13.00  5.2 
COLEF  -7.2  -8.0  12.0  -15.0  -27.0  -28.0  6.1  13.00  5.5 
UAdeC  -7.0  -6.0  1.5  -11.7  -22.0  -21.0  5.4  13.60  6.0 
                   
Consensus -- this quarter  -7.1  -6.9  2.3  -11.8  -20.1  -20.3  5.0  13.39  5.5 
                   -- last quarter  -4.8  -3.0  2.5  -6.4  -14.1  -11.9  5.6  13.63  6.3 
                   
2010 Mexico Consensus Economic Forecast              Annual Average 
  Annual Percent Change, 2010 from 2009     
  GDP 
Private 
Consumption 
Government 
Consumption 
Total 
Investment  Exports  Imports 
Consumer 
Price Index 
Exchange 
Rate 
CETES 
28 Day 
American Chamber Mexico  2.6  2.9  0.6  6.0  8.8  9.4  3.9  13.40  5.0 
JPMorgan Chase Bank  5.0  n/a  n/a  18.0  17.0  -12.0  3.4  13.00  5.8 
BBVA Bancomer  2.3  1.0  2.3  4.4  11.5  8.9  3.8  13.00  4.2 
Wells Fargo Bank  2.2  2.5  2.3  1.1  2.7  2.3  3.8  13.10  4.5 
Center for Economic Forecasting of Mexico  3.0  3.2  2.5  6.5  4.5  5.5  3.6  12.75  4.5 
UACJ  2.5  2.0  1.5  2.0  3.0  4.0  4.0  13.00  5.0 
ITESM  2.0  2.0  6.0  4.0  10.0  15.0  4.0  13.20  5.0 
COLEF  -0.8  1.0  0.0  -2.0  -1.0  -2.0  4.0  15.00  6.0 
UAdeC  1.5  1.3  -1.0  2.8  3.8  3.0  5.0  14.00  7.0 
                   
Consensus -- this quarter  2.3  2.0  1.8  4.8  6.7  3.8  3.9  13.38  5.2 
                   -- last quarter  1.6  1.3  1.6  4.8  4.4  4.2  4.6  13.60  6.3 
 
 
 
 
 
 
 
 
 
 
               Annual Averages 
Historical Data 
GDP 
(2003 
Pesos, 
billions) 
Private 
Consumption 
(2003 Pesos, 
billions) 
Government 
Consumption 
(2003 Pesos, 
billions) 
Total 
Investment 
(2003 Pesos, 
billions) 
Exports 
(2003 
Pesos, 
billions) 
Imports 
(2003 
Pesos, 
billions) 
CPI 
June 
2002 = 
100  
Nominal 
Exchange 
Rate 
Pesos/ 
Dollars 
CETES 
28 Day 
2008  8,928.6  6,220.0  930.5  2,050.6  2,710.2  3,057.6  129.2  11.14  7.68 
Percent Change  1.35%  1.54%  0.59%  4.94%  1.40%  4.29%  5.13%  1.92%   
2007  8,809.9  6,125.5  925.0  1,954.0  2,672.9  2,931.7  122.9  10.93  7.19 
Percent Change  3.33%  3.86%  2.14%  7.17%  5.66%  7.00%  3.97%  0.28%   
2006  8,526.0  5,897.8  905.6  1,823.3  2,529.7  2,740.0  118.2  10.90  7.19 
Percent Change  5.13%  5.68%  1.72%  9.78%  10.94%  12.57%  3.63%  -0.16%   
2005  8,110.2  5,580.7  890.3  1,660.8  2,280.3  2,434.0  114.1  10.92  9.20 
Percent Change  3.21%  4.78%  2.44%  7.46%  6.75%  8.48%  3.99%  -3.29%   
2004  7,857.7  5,326.0  869.1  1,545.5  2,136.1  2,243.8  109.7  11.29  6.82 
Percent Change  4.00%  5.62%  -2.76%  8.01%  11.50%  10.74%  4.69%  4.63%   
2003  7,555.8  5,042.8  893.8  1,430.9  1,915.8  2,026.2  104.8  10.79  6.23 
Percent Change  1.35%  2.22%  0.80%  0.37%  2.70%  0.70%  4.55%  12.05%   
2002  7,455.0  4,933.1  886.7  1,425.6  1,865.5  2,012.2  100.2  9.63  7.09 
Percent Change  0.83%  1.59%  -0.33%  -0.64%  1.44%  1.46%  5.03%  3.10%   
2001  7,393.9  4,856.1  889.6  1,434.8  1,839.0  1,983.2  95.42  9.34  11.31 
Percent Change  -0.16%  2.48%  -1.98%  -5.64%  -3.60%  -1.63%  6.36%  -1.27%   
2000  7,405.5  4,738.7  907.6  1,520.5  1,907.6  2,016.1  89.71  9.46  15.24 
Percent Change  6.60%  8.18%  2.38%  11.36%  16.28%  21.47%  9.50%  -1.05%   
1999  6,946.9  4,380.3  886.5  1,365.4  1,640.5  1,659.7  81.93  9.56  21.41 
                   
Note: 2008 Data are preliminary and subject to revision               
*GDP: Producto Interno Bruto, INEGI, 2003 Pesos                 
*Private Consumption: Consumo Privado, INEGI, 2003 Pesos               
*Government Consumption: Consumo de Gobierno, INEGI, 2003 Pesos             
*Total Investment: Formación Bruta de Capital Fijo, INEGI, 2003 Pesos             
*Exports: Exportación de Bienes y Servicios, INEGI, 2003 Pesos               
*Imports: Importación de Bienes y Servicios, INEGI, 2003 Pesos               
*CPI, Banco de México, Annual Average, Base = June 2002               
*Exchange Rate, Banco de México, Peso-to-Dollar, Fecha de Liquidación, Annual Average           
*CETES 28 Days, Banco de México, Annual Average                 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
University of Texas at El Paso 
Diana Natalicio, President 
Richard Jarvis, Provost 
Roberto Osegueda, Vice Provost 
 
 
UTEP College of Business Administration 
Robert Nachtmann, Dean 
Pat Eason, Associate Dean 
Steve Johnson, Associate Dean 
Tim Roth, Templeton Professor of Banking & Economics 
Border Economics & Trade 
 
 
UTEP Border Region Modeling Project Corporate and Institutional Sponsors: 
El Paso Electric Company 
Hunt Communities 
Hunt Building Company 
Las Palmas & Del Sol Healthcare 
JP Morgan Chase Bank of El Paso 
Universidad Autónoma de Ciudad Juárez 
UTEP College of Business Administration 
UTEP Department of Economics & Finance 
UACJ Instituto de Ciencias Sociales y Administración 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
México Consensus Economic Forecast, a quarterly publication of the Border Region Modeling Project, a research unit within the 
Department of Economics & Finance at the College of Business Administration of The University of Texas at El Paso, is available on 
the  Web  at:  http://academics.utep.edu/border.    Econometric  research  assistance  is  provided  by  Emmanuel  Villalobos  and 
EnedinaLicerio.    For  additional  information,  contact  the  Border  Region  Modeling  Project  -  CBA  236,  UTEP  Department  of 
Economics & Finance, 500 West University Avenue, El Paso, TX 79968-0543, USA. (915) 747-7775. 
 

The Trough Deepens

Abstract

Similar works

Full text

Available Versions

Research Papers in Economics