We started the month with the news of the imposition of special tariffs on Mexico, Canada, and China. However, after Trump’s conversations with Sheinbaum and Trudaeu a few hours later, the “punishment” was deferred, and tariffs will not be imposed until March 1st. I don’t understand what Trump expected to see in the 10 days between the announcement of the tariffs and their entry into force unless it was just the start of a negotiation where he attacked hard and then softened his position to reach an acceptable agreement.
Analysts estimate that if the proposed measures come into force, inflation in the United States would rise by 0.8% in the year, and GDP growth would fall from 1.1% to a paltry 1%. Of the thirteen million cars sold in the United States, 42% are manufactured in Mexico and 12% in Canada. In general, 40.3% of car parts are manufactured in Mexico. Of the 617 billion dollars that Mexico exports, $194 billion, or 31%, are cars, without counting additional components.
The fight against drug trafficking and the entry of fentanyl, as well as the porosity of the border, are problems that helped Trump win the presidency and will make them the central issue of his administration. Mexico can put more soldiers on the southern and northern borders and somehow prove that it is fighting drug trafficking. Still, we know that it is very much connected to the government and has acquired an enormous force that will make it very difficult to fight it with the intensity the Americans demand.
United States.
Trump’s cabinet has been taking shape as the Senate approves his nominees and, except for a few problematic cases such as Kennedy for Health and Gabbard for Homeland Security, practically all the rest will form the team that will run the country for the next four years. There is no doubt that there will be very significant changes when comparing Trump’s new policies with Biden’s, especially about DEI (diversity, equity, and inclusion), investment in combating climate change, international aid that costs trillions a year, and the definition of gender where the President stated that there are only two sexes, male and female.
The search for ways to reduce useless or excessive spending entrusted to Elon Musk will bring changes to the bureaucracy. Still, I don’t think it will remotely achieve the announced savings of $2 trillion since of the total public spending ($7.3T), only $1.7T is not “committed” (Social Security, Medicare, debt service and defense) and if it were possible to eliminate the 20% of superfluous spending would save 340 billion dollars.
The economy in the United States is still robust, with unemployment at 4.1%, relatively controlled inflation slightly below 3%, high consumer confidence, and reports of manufacturing and purchase of production goods above forecast. The new Treasury Secretary proposed an economic plan he called 3-3-3, in which he proposes GDP growth of 3%, a maximum budget deficit of 3%, and an additional daily production of 3 million barrels of oil.
I find Trump’s fiscal plan very aggressive, as it seeks to eliminate taxes on such items as tips, overtime, and Social Security payments. It is also planned to allow deductions for state and property taxes and to renew all the reductions approved in 2017 and expire this year. Supposedly, all these reductions will be compensated by tariff revenues, which, at the end of the day, are paid by consumers, along with the consequent inflation. This affects the government deficit and the cost of servicing the debt since the FED will have to increase interest rates if inflation rises.
Other significant changes that we will see in the coming months include the lifting of the ban on oil drilling in federal waters that Biden sent to Congress last week, the return to work of all federal employees who have supposedly been working from home since the pandemic, and the vacating of hundreds of unoccupied government-leased office buildings. By the way, many private companies are also returning their employees to work full-time.
An interesting fact about the US economy shows us that when Trump became president in 2017, the public debt in private hands was $14.4 trillion. At the beginning of his current administration, this amount is double, $28.8T. In a recent survey, the biggest concern of American consumers was inflation, and the average perception of it was 6.7%, while in reality, it was 2.9%. People don’t understand that the measurement is from one year to the previous one and not against the 4-5 years ago prices. The population growth in the United States was 3.4 million, but if immigration is excluded, the figure was less than 1 million. It is projected that by 2033, there will be more deaths than births in the country annually.
Losses suffered by the banking system amounted to $46 billion in the first 9 months of 2024, the highest figure since 2010. This amount could go much higher if the commercial real estate crisis, especially in offices, occurs this year when many loans that were granted when interest rates were extremely low are due. The increase in the cost of servicing the public debt, that is to say, the total interest paid by the government, has risen 285% in the last 10 years, and this will obviously grow much more if deficits of more than $2 trillion a year continue. 1.6 million unemployed people have been looking for work for over 6 months, even though the national vacancy rate exceeds 8.02 million. There is not necessarily a balance between these two positions.
Home sales in the United States continue to fall due to high mortgage rates, low inventories, and buyers’ reluctance to leave a 3% mortgage to switch to a 7% one. Sales in 2024 were 4.06 million homes, the lowest since 1995. Another interesting fact is that at the beginning of December, the market value of the chip company NVIDIA exceeded the total value of the UK stock market.
It is worth commenting on artificial intelligence and the changes in the market following the announcement by the Chinese company Deep Seek. Until a week ago, the only talk was of US dominance in artificial intelligence. The constant themes were the multiple applications that would change the way business operates, the enormous need for electrical power to operate the computer network that would support AI, and the stock price of NVIDIA, the main supplier of the necessary chips, which made it the most valuable company in the world. Between Microsoft, Google, and Amazon, $343 billion has been invested in artificial intelligence systems.
Suddenly, a Chinese company appears that claims to reduce the cost of equipment to just $6 million, less than 3% of comparable systems in the United States, and shakes the technology world. Many explanations have been given, ranging from the slight reduction in precision by using only eight decimal places instead of 32 for calculations to the fact that they are using a lot of US technology or that the actual cost is much higher, but what is undeniable is that the Chinese have great technology and will be a difficult rival to beat in the field of computing.
Mexico.
Moving on to Mexico, there were not many changes in January, although the Plan Mexico was announced. It will be presented on February 12th. It brings several incentives to production, such as tax subsidies based on accelerated depreciation, a thorough review of Peña Nieto’s electricity reform, and confirmation of the opening to foreign investment in generation. It also includes a review of the structure of PEMEX, looking at how to make the company more efficient and how to manage its debt, but we will wait for the next letter to assess the impact of the plan presented by the President.
Here is the list of the positive and negative things for Mexico and its economy.
Positives:
· Remittances took a turn for the better again, bringing the central bank’s reserves to a record of $230.254B
· The business sector responded favorably to the announcement of Plan Mexico
BYD announced that it will build an electric car plant starting in 2025
Amazon announced an investment of more than 1 billion dollars
The chemical sector announced investments that will increase production by more than 15%
PEMEX announced that by March, it will catch up on its overdue payments to suppliers
A good trade agreement was reached with the European Union
Negative:
· The trade deficit grew 50% in 2024
· President Sheibaum spoke out against the suspension of one of the judicial selection committees, which could have limited judicial reform
· December saw the worst fall in formal employment on record since these statistics began to be kept. Formal employment had its lowest growth since 2009
· Despite a good “Buen Fin” (Good Weekend), retail sales had their worst November in 7 years
· 2024 saw the largest outflow of foreign capital from public bond and equity markets since 2011, a total of 5.304 billion dollars
· General Motors announced that it will move part of its production from Mexico to the United States
· Producer prices rose 7.49% in the year, and inflation was estimated at 4.21% for 2024
· The consensus among economists is that GDP will only grow by 1.3% in 2025 if trade sanctions do not come into force, and there could well be a contraction of up to 2.4% if the trade war starts. It is worth noting that historically when there are tariffs, for every 10% increase, they are neutralized by a 4% devaluation, the latest example of this being what happened in China with Trump’s previous taxes, the effect of which was low due to the 11% drop in the value of the yuan against the dollar.
Israel.
According to the latest data, Israel’s economy grew by 0.6% in 2024, but growth of 4% is expected in 2025 and 4.6% in 2026. January began with a sharp increase in taxes and the prices of public services to offset the cost of the wars in Gaza and Lebanon. Despite these increases, the country had a deficit of 6.9% of GDP for the year and needed to issue $76 billion in international debt.
The country’s cost (what is paid over and above the interest on the US government debt) is at 0.9% after reaching 1.6% at its highest point in the current war. Surprisingly, investment in new technology companies grew by $10.8 billion, 28% higher than the previous year.
The impact of spending on the war is felt in other areas of the government budget for 2025, where even the higher education line was cut by $110 million. The costs of the war in 2024 were $27 billion, and it is optimistically expected that they will be less than half that in 2025.
China.
China entered a situation of deflation that further aggravated its problems of a decreasing population and an increase in the average age of its citizens. The forecast growth for 2024, which will not be reported until March, was 5.4%, but these figures are not very reliable. Without considering the effect of possible US tariff increases, the expectation is that GDP growth in 2025 would be only 4%.
China’s problems derive from its tremendous growth over the past decade in residential housing construction (the three largest companies are bankrupt), with 20 million houses unfinished or uninhabited. Similarly, due to the enormous boost to infrastructure works that saturated the country with roads and airports, there is no longer any need for such rapid growth in these areas. The debt of the Chinese provinces is enormous, and they are already defaulting on their interest payments by paying with new long-term bonds. The central government acknowledges that it has no control over provincial debt, and liabilities are estimated to exceed government reserves.
International.
I wonder where global GDP growth will come from when the “big” ones like China grow 4%. India is estimated to grow between 6.5% and 6.8%, compared to 10% a couple of years ago. Europe expects a contraction of 0.7%, and the United States will barely grow 2% if it does well. Saudi Arabia has committed to investing $600 billion in the United States to solidify its relationship with Trump and has hinted at the possibility of reaching $1 trillion.
Finally, I want to mention the Milei phenomenon in Argentina, where the country emerged from recession in the fourth quarter with annualized growth of 5%. Inflation also fell from 27.4% per month to “only” 2.3% per month but with real income for workers. It will be interesting to see how long the honeymoon with workers lasts, as historically, unions have been responsible for the disasters in Argentina’s public finances.
Markets were very volatile following the start of the Trump Administration, with the stock market rising slightly, although technology companies moved in the opposite direction. Bonds rose a little more than their coupons, the dollar held firm, and gold reached an all-time high, as did bitcoin, although the latter returned to $98,000 after touching $109,000. It was interesting to see how the peso reached $21.55 on the night of February 1st but returned to $20.40 after the agreement to postpone the 25% tariffs for a month.
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