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Ecanal conducts economic research and analysis of economic trends in Mexico's risks and opportunities, and of government policy from the perspective of the private sector with a normative approach. It offers business a structured view of key economic issues and forecasts with a straightforward, direct language, as an aid to company planning.

WHERE IS THE ECONOMY? (19 November 2019)

Posted 19 November 2019 by rro

Global economic growth has slowed this year, as we expected in our previous update, last February and it should continue further down. Unlike the euro zone and China, where there are structural problems preventing a full recovery, the US has a better outlook, though slowing down too. US structural conditions explain that the engine of domestic consumption is still up. Investment has been falling because it is more dependent on global demand, especially in manufacturing, but it remains sensitive to any potential interim trade agreement between the US and China. Overall, however, we do not see a return in the US to the open trade policy on China, which must send clear warnings to global firms on the need to seek alternative sites for manufacturing different from China.

The Fed has changed the stance it had clearly followed up until its rate increase at the end of 2018, to "normalize" interest rates and reduce its balance sheet. After three rate cuts, the first one on the premise of buying an "insurance" against the effects of a global slowdown, it has now, in fact, accepted that the 2.5% rate was the highest for the monetary cycle. Now it must wait to see whether and when it must reduce rates further, from its present fed fund rate at 1.75%, which may take some time.

The greatest problems in the short term remain in the euro zone and China. The former is unable to conquer permanent growth as it maintains a rigid exchange rate between its members and a monetary policy that has entered into the uncertain terrain of negative policy rates. At the same time, it has maintained strict limits on fiscal deficits, when there is no domestic engine of growth. China is slowing under the burden of insufficient external demand and a heavy burden of domestic debts and other portfolios likely to deteriorate. Alternative indicators of Chinese growth are pointing to 3% to 3.5% growth rather than 6.3% as shown in official statistics.