I write this letter on March 3rd, one day before the supposed imposition of 25% tariffs on products imported into the United States from Mexico and Canada. I don’t know how the current administration plans to handle the fact that components come and go between countries, but due to globalization and free trade agreements, the movement across borders is enormous. I don’t know if they plan to collect the tariff as many times as a component of the finished product crosses the border.
In 2024, imports to the United States from Mexico were $508 billion and $412 billion from Canada. Associating tariffs with closing access to borders can be measured by the number of soldiers preventing border crossings and by the number of undocumented immigrants arrested by US agents, but knowing how much fentanyl is still entering the country is almost impossible. There is no doubt that if the tariffs last, there will be repercussions, both in inflation and in consumption, since many products cannot be substituted by domestic manufacturing, which practically no longer exists. Fifty percent of consumption in the United States comes from the highest-income 10% of the population, who are unlikely to change their shopping habits, but the other 90% will feel the blow to their purchasing power.
Last week, we saw a very unpleasant incident during President Zelensky’s visit to the White House. The supposed formal meeting in front of the press and television cameras, where a cooperation agreement on the extraction of minerals necessary for the manufacture of semiconductors and some types of steel, raw materials that Ukraine has and the United States do not, was to be signed. It is worth mentioning that China largely dominates the market for these minerals and that the Americans are very concerned about their dependence on China. Hence, the outcome of this meeting was truly surprising. The meeting ended in an exchange of shouting and even insults and the unfriendly sacking of the Ukrainian from the White House.
It is clear that Zelensky believed that the signing of the agreement included clauses protecting Ukraine from the Russians and defending his country. Still, the United States left it until later to talk about putting an end to the Russian invasion and the possibility of joint intervention with Europe to protect Ukraine. We do not know how much had been negotiated before the official meeting on Friday the 28th, but the public should only be shown the cordial signing of the treaty and not the talks to reach an agreement.
The Republican-controlled Senate and House of Representatives have already approved the entire cabinet proposed by Trump. The new Department of Government Efficiency (DOGE) has been active, finding unnecessary spending and excess staff. In my opinion, each project should be carefully reviewed before eliminating everything indiscriminately, as some projects and expenses are necessary. It is interesting to see the independence of the judiciary in the United States, which confirms the value of the institutions and respect for the rule of law. Many of the initiatives of the Executive have been stopped by judges, and we will see what happens as they go through the higher courts, including reaching resolutions in the Supreme Court.
The US economy remains strong, although there are signs that consumers are becoming more concerned, and confidence indices are at their lowest point in a year. Inflation remains at 3%, higher than the 2% targeted by the FED, and only thanks to a 2.3% increase in productivity, the highest in four years, has price stabilization been achieved. The US trade deficit was $918.4 billion last year, a figure that provoked Trump’s ire and the accusation that countries are taking advantage, which is the main reason behind the proposed tariffs. Unemployment has remained at around 4%, a figure that a few years ago would have been considered “full employment.” Still, it is now feared that it could rise to 5.5% if the increased cost of tariffs causes inflation that affects consumption.
Home sales are at a 20-year low, falling 4.9% due to a 5.3% increase in prices, the national average, and mortgage interest rates of 6.22% for subsidized homes and 7% for jumbo loans. One piece of data that I found interesting is that in 2024, the number of houses listed for sale that were temporarily withdrawn from the market because no buyers were willing to pay the asking price increased by 64% over the previous year.
There are still 7 trillion dollars in money markets, which can be invested at any time, which creates a floor for the stock markets and allows us to foresee that the US economy is not facing a crisis in the short term. It is interesting to note that the US government has “found” almost 1 trillion dollars, as the gold they have stored in Fort Knox is valued on their books at $42.22 an ounce, while the market value is $2,900/oz, thus improving the national balance.
To date, 75,000 government employees have accepted the offer to resign with 7 months’ pay in severance, 2.5% of the total number of bureaucrats. All the layoffs caused by Elon Musk’s team have a negligible effect on unemployment but impact people’s confidence. Of the total number of jobs in the United States, only 8.1% are in the manufacturing sector, but this is the area on which President Trump has focused most. It is difficult for this to increase considerably, even if tariffs are introduced, as setting up new factories in the United States is costly and time-consuming. What would happen if they cancel the tariffs and the new factories are at a disadvantage against those who continue to produce in countries with low labor costs?
Rumor has it that the United States would issue a 100-year zero-coupon bond that would be mandatorily exchanged for short-term debt with foreign countries currently holding large amounts of government bonds. I don’t think this will happen, but it would be another way to retaliate against the alleged commercial abuse to which the United States has been subjected.
I wouldn’t be surprised if the GDP growth report for the first quarter was negative, given consumer uncertainty, reduced government spending, and increased imports to bring in products before the tariffs came into effect.
I found a couple of interesting facts: Walmart employs 1.6 million people in the United States and 2.1 million worldwide, making it the world’s largest job creator. Alcohol and beer sales in the United States were down 5.1% in 2024 from the previous year, led by a 6.7% drop in volume and a 3.3% drop in the price of tequila.
Moving on to Mexico, the situation remains stable, although there is great concern about the relationship with the United States and the future of the CUSMA/USMCA/T-MEC. President Trump spoke highly of President Sheinbaum, but that did not prevent him from imposing 25% tariffs on steel and aluminum despite offering a grace period until March 4th. We do not know if the extradition of 29 drug lords and Mexico’s offer to raise tariffs on products arriving from China will make the relationship less aggressive.
As I do every month, I have prepared a list of positive and negative facts about the Mexican economy.
Positives:
· The credit portfolio has been at its highest volume and quality level since 2020; in January 2025, it increased by 10.6%.
Foreign investments of over $5 trillion were announced, mainly from high-tech companies and large marketers. Despite the threat of tariffs, Netflix announced $1 billion in investments, and BMW announced $800 million in investments.
Volaris reported its first increase in traffic since February 2023.
· The entry of transgenic corn was approved, resolving a serious controversy within the CUSMA/USMCAT-MEC.
· Inflation has remained in the 2-4% range sought by Banxico for the first time since 2021.
· Tax collection grew 4.3% over the previous year.
Negative:
· GDP growth expectations for 2025 continue to be revised downwards, ranging from 0.6% for IMEF (which even discussed the possibility of a recession) and Wells Fargo to 1% for Banxico and Citibank. This is mainly due to the uncertainty of tariffs and the weakness of public finances following AMLO’s 6.9% deficit last year.
Mexico has the worst GDP growth outlook in all of Latin America.
Infonavit has already destroyed the balance between workers, employers, and the government, becoming a builder rather than a bank.
Six consecutive months of foreign capital outflows from the stock exchanges, the longest period in 10 years.
The fourth quarter of 2024 saw a 0.6% contraction in GDP.
· The two main government companies reported very high losses, Pemex 9.3 billion dollars and debt of $97.8B, 5% of GDP, and the Federal Electricity Commission $1B and debt of $26.4B, 1.5% of GDP. Some of the reforms President Sheinbaum sent to the Senate, such as the reform of Article 40 to preserve Mexico’s sovereignty and those relating to nepotism and re-election, are interesting. Still, they do not show a distancing from AMLO or have a significant impact. There is no doubt that a complicated time is approaching, and dealing with the monster to the north will require considerable political skill.
Israel continues to go through very complicated times, mainly because of the truce with Hamas, which, although it managed to free 20 hostages alive, the terrorist group has reconstituted itself and threatens to repeat attacks in the future. There are still 59 hostages in the hands of Hamas, some alive and some not, but Israel is not going to accept withdrawing from Gaza while terrorists are still in charge of the territory.
The GDP fell to 2.5% when comparing the 4th quarter of 2024 with that of 2023, mainly due to the tensions and events with Hezbollah and the events in Syria. The forecast for 2025 was reduced from 5.4% to 2.7% due to the impact of the continuing war with Hamas and the enormous military spending, coupled with the lack of a workforce due to reservists being called up to the front. Inflation is under control at around 2.3%, and the currency has remained stable despite the crisis. The central bank left the discount rate at 4.5%. In the month, Israel issued $5 billion in bonds, half for 5 years and a half for 10 years, at a combined rate of 5.64% with an A rating, which was very well received by the market with an oversubscription of 2.6 times the amount issued.
As for the rest of the world, total military spending by countries is $2.5 trillion a year, 1.9% of global GDP and 7.3% higher than in 2023. Inflation in Brazil is still above 6%, and is one of the few countries raising interest rates instead of lowering them to stimulate the economy. Lula said that the BRICS alliance of emerging countries could stop using the dollar as a currency of exchange, but I don’t see it as feasible, as the US currency is still used in 74% of global transactions.
Speaking of China, it will be interesting to see how it responds to possible tariffs, as in 2024 it exported $504 billion to the United States, which would be affected. Several stimulus programs have already been announced, including lower prices on unsold homes and better mortgage rates. An interesting fact: in 2024, there were only 6.1 million weddings in China, 20.5% less than in 2023 and the lowest figure since 1986. The population is expected to shrink, which creates enormous economic problems, as seen in Japan, whose economy has seen almost no growth for 20 years.
Stock markets fell by around 1% in February, but bonds rose in value. The 10-year bond rate fell from 4.51% to 4.21%, and gold hit an all-time high of over $2,950. 00/oz, although it dropped to $2,870.00 at the end of the month. Bitcoin plummeted to $83,200, 25% below its all-time high. Foreign currencies remained fairly stable, including the peso, which is still around $20.50, but if the tariffs go through, we could see it at $21.30
Further Reading: