The Fed’s monetary policy error, the biggest global threat

The most important risk factor for Mexico and the world next year is a possible error in the Fed’s monetary policy, warned Esteban Polidura, director of investments for the Americas at the bank Julius Baer.

“If the Fed keeps rates high longer than necessary and triggers a recession or cuts rates prematurely, the result would be an inflationary environment, that would be the most important risk for Mexico and globally,” he said.

In an interview with El Economista, he explained that the global economic slowdown expected next year results from “headwinds” facing the United States and Europe from fiscal and monetary policy, and also includes the impact of China’s continued weakness.

The World Bank’s expectation for Mexico is for gross domestic product (GDP) growth of 3.3% this year, easing to 2% by 2024.

“The United States is the main engine of the world economy, and as the number one trading partner, Mexico benefits more than any other country,” he said.

From Switzerland, he emphasized that Mexican companies and domestic consumers have shown resistance to high rates.

At the beginning of the year, the aforementioned bank expected Mexico’s GDP to grow by 0.6% in 2023, now it is 3.3 percent.

Polidura estimates that inflation in Mexico will end the year with a margin of 4.6% and that it will hover around 4.3% next year.

“Banco de México’s monetary policy decisions will be closely linked to those of the Fed.”

Julius Baer expects the Fed to cut rates by 75 basis points next year, with a steeper pace of cuts than indicated in September.

Nearshoring, a marathon for Mexico

For an expert, nearshoring is a product of deglobalization that began long before the pandemic. Mexico continues to benefit from the productive investment opportunities that nearshoring has brought with it. It refers to the renewed interest of multinational companies based in Asia and the Pacific, which are looking for new territory to get closer to their end market, which in this case is the United States.

believes that this relocation of companies should lead to greater flows of foreign direct investment and more exports; This influx of productive investment should keep GDP growing at close to 2% per year in 2024.

“We view the nearshoring issue as a marathon rather than a sprint race (for Mexico), so its most relevant effects will be felt in the long term,” he warned.

In his view, this relocation of multinationals is “a story with potential for the next decade”.

“In the short term, the impact on the Mexican economy should be small. The cycle for a company moving its operations from Asia to Mexico is several years. Buy land in the initial phase; It establishes operations in a transition phase and eventually comes the hiring of staff and economic benefits.”

Economic competition and the rule of law

The analyst explains that investors are looking around the world for the best place to take their companies. They require clear rules and transparency from Mexico in long-term compliance with the law. Strengthening the rule of law will be decisive for encouraging the arrival of further investments.

He believes that entities in the north of the country are likely to benefit the most from investment decisions by multinational companies that intend to leave Asia to move their supply chains closer to the United States. It’s simply a matter of infrastructure.

He estimates that the time it may take for Mexico to strengthen its attractiveness for productive investors will depend on the electoral process in 2024. The challenge is that the electoral process does not disrupt the proper functioning of all government areas involved and that the new administration focuses on this issue.

He explained that nearshoring has the potential to strengthen the Mexican economy in the long term. Different entrepreneurs and families could take advantage of different opportunities.

ymorales@eleconomista.com.mx

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