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Ataman Ozyildirim

Ataman Ozyildirim is an economist and director of business cycles and growth research at The Conference Board.
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Why Mexico’s Economy Is Putting On The Breaks

June 27, 2017 | No Comments »
More on: Economic Indicators & Forecasting, Global economic outlook, Growth, Productivity & Competitiveness, Labor Markets, Productivity & competitiveness

Cinco de Mayo Aside, Little to Celebrate In May

A Conference Board analysis was recently released and projected Mexico’s economy to grow at 1.8 percent in 2017.  This marks a downward revision from an earlier projection of 2.6 percent made last November, and slower than the estimate of 2.1 percent in 2016.

So what accounts for the slowdown?

No single culprit exists.  Instead, look to a trifecta consisting of rising inflation and interest rates, a possible trade conflict with the US and business sector uncertainty.  Together, they have formed the perfect storm – and the serious punch they pack warrants a look at each.

Heightened Inflation Concerns And Tightening Monetary Policy

In May, the central bank of Mexico (Banixco) raised its benchmark interest rate to 6.75 percent – up from 3.75 percent a year earlier, largely because inflationary pressures have been increasing.  Back in April, the peso weakened against the dollar by 7.2% relative to a year earlier, fueling concern about the rising prices of imports.

As the weakening currency makes its pain felt in higher import prices, the inflation outlook is also compounded by the recent fuel price hike, and public service costs continue rising.  Inflation will likely stay high throughout 2017.  Overall inflation stood at 5.7 percent in April, its highest rate since December 2008, when it clocked in at 6.3 percent.

The expected interest rate increases by the US Federal Reserve also raise the prospect of more tightening by central banks in emerging markets, including Mexico. Another constraint on Mexico’s growth comes from fiscal consolidation, which will reduce public spending over the next few years.

Mexico blog picture

A Potential Trade Conflict With The US

Mexico has much to lose if its trade relationship with the US turns sour. In 2014 alone, global demand accounted for close to 20% of Mexico’s GDP. And within that slice of 20%, over half came from consumption and investment of products in the US. In other words, the US end of the value chain has been the main impetus for Mexico’s external sector and a key determinant of its GDP.

A trade war with the US could deal a blow to Mexico’s manufacturing sectors. Among the potential victims: the transport and electrical equipment industries, which depend on exports to the US. Also, the country’s metals, machinery, and chemicals sectors may be hurt as they depend on imports from the US.

Higher Uncertainty In The Business Sector

Consider the political dynamics inside and outside of Mexico. Looking abroad, the North American Free Trade Agreement (NAFTA) stands out. Still, it is anyone’s guess as to how a renegotiation of NAFTA will affect industrial value chains. Internally, Mexico will conduct its state elections next month, and next year it will hold its presidential election.

Along with political factors, also consider the workforce and its productivity. Mexico’s labor cost per unit of output has dropped since 2013 and has made the economy more competitive. However, competing on low-cost is not necessarily the way to sustain Mexico’s competitiveness in the medium term. This will require faster productivity growth which doesn’t seem to be in the cards without more investment and reforms beyond the energy and oil sectors. Mexico could easily lose business to countries like China, which show productivity improvements despite rising wages and strong currencies.

“But by no means is the future for the Mexican economy all doom and gloom”

First, some silver linings among the 2017 clouds exist. In the first quarter of 2017, leading economic indicators rebounded, reversing a marked deterioration at the end of 2016 caused by falling confidence and oil prices. Also, US trade rhetoric toward Mexico has recently moderated. Confidence of businesses and consumers also has rebounded. And this year, Mexico will likely benefit from a cyclical upswing in the global economy, especially in manufacturing and global trade.

Looking beyond 2017 to the decade ahead, successful qualitative growth sources such as human capital, innovation, and digital transformation, will have to go a long way — beyond quantitative sources such as growing labor force and more investment — toward Mexico achieving its full potential. Mexico could conceivably more than double its current economic growth over the next 10 years to an average potential growth rate of 3.9 percent, but at least a third of that growth would have to come from those qualitative sources.

What could ignite such qualitative sources to fully materialize? That depends on a host of economic reforms such as improvements in education, labor markets, telecoms, and financial markets.

“All of the above could increase investment, both tangible and intangible, and help Mexico get the most out of international trade.”

This piece originally appeared in “Emerging Market Views”.

How The G-20 Leaves Emerging Markets In Limbo

March 30, 2017 | No Comments »
More on: Global economic outlook, Global Value Chains, Growth, Productivity & Competitiveness, Productivity & competitiveness, Sustainability, innovation & growth

Trade Sentiment Lingers, Emerging Markets Face Headwinds

There is little doubt that anti-trade sentiments are clouding the future of the global economy.

For proof, look at the March G20 meeting in Frankfurt, Germany, which made headlines for excluding anti-protectionism language in its joint declaration. This clearly  broke the G20’s tradition of giving a thumbs-up to trade. If public officials backpedal on their commitment to open trade, they will jeopardize prosperity worldwide, especially in emerging markets.

Three things may happen if the anti-trade train continues to gather steam. Every one of them will surely keep business leaders up at night—and not for celebration.

Rising Volatility

While emerging markets are usually volatile, they have enjoyed high growth as global growth and trade expanded. Now, the pro-trade and pro-growth environment that brought sustainable global growth could be giving way to one that is considerably more uncertain as a number of mature economies turn their attention inward. Most emerging market economies depend on demand from these mature economies, so they are especially vulnerable to rising trade protectionism.

Forecasts suggest that 2017 global economic growth could inch up to 2.9 percent – up from 2.6 percent in 2016 and slightly better than earlier projections on the back of better performance from energy-producing emerging economies and some momentum in the US, Europe, and Japan. But uncertainties—including those on the trade front—continue to weigh down growth prospects for emerging economies, especially India, Mexico, Turkey, and Saudi Arabia.

On the upside, the US, Europe, and Japan are experiencing stronger internal growth dynamics. Still, this slight boost—even if it fully materializes—will lack the economic punch to ignite emerging markets.

Trade Markets Reshuffled

The evident lack of consensus from the G20’s March meeting on commitment to free trade puts trade-boosting agreements at risk. In particular, there’s America’s marked shift in its trade stance—namely, the death of the Transpacific Partnership (TPP). To make matters worse, little prospect exists for progress on the Transatlantic Trade and Investment Partnership between Europe and the US. While the Comprehensive Economic and Trade Agreement between the European Union and Canada passed, if barely, the future of the North American Free Trade Agreement (NAFTA) moved further into uncertain territory.

How can a reversal of trade fortunes affect emerging economies? Consider Mexico. The US market accounted for more than 80 percent of Mexico’s 2015 exports, according to the World Trade Organization. While that number overstates Mexico’s reliance on the US economy (by also including US imports that are re-exported), Mexico’s reliance on the global economy nonetheless remains intense. Recent Conference Board research using the World Input-Output Database reveals Mexico’s dependence on the global economy has significantly increased in the past two decades. In fact, global demand currently helps to generate close to 20 percent of Mexico’s GDP, a major chunk of it being from the United States.

As the larger trade partner within NAFTA, the share of US demand in Mexico’s GDP that results from demand from abroad is large—about 70 percent on average during the past 15 years. The opposite is not true. Mexico’s economy will suffer both from US trade protectionism and, indirectly, from US-engendered global trade protectionism.

Productivity Puts On The Brakes

Over the next decade, the world economy looks all but certain to putter along. The aging workforce and slowing productivity growth represent structural trends that are nearly impossible to change in the near term. The world economy will find it hard to reach and maintain 3 percent growth. While emerging markets will continue to contribute the lion’s share of global growth, they are not immune to the major trends slowing global growth. Examples are China’s aging workforce and Latin America’s slowing productivity, notably in Brazil.

Emerging markets will grow on average 3.6 percent per year in the next decade, down from 4.1 percent in 2012-2015. For the medium term there are no signs yet that policy changes will alter the trend. On the contrary, signals from the G20 finance ministers’ meeting suggest the opposite.

If the global free-trade agenda gives way to greater protectionism, the repercussions could put emerging economies in limbo. Also, the potential positive effects of trade on productivity and competitiveness recede farther out of reach.

Looking ahead, the outcome of several elections in Europe this year will affect how far anti-trade sentiment will advance. The next G20 summit will take place in July, and it remains to be seen whether this twelfth meeting of G20 leaders will provide more hope for emerging markets instead of more gloom. To a large extent, their prosperity—and that of the entire global economy —depends on it.

This piece originally appeared in “Emerging Market Views.”

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