Key Figures and Their Warnings
As global economic instability intensifies, Agustín Carstens, outgoing president of the Bank for International Settlements (BIS), has issued a stern warning. He states that rising trade tensions and geopolitical fragmentation are unraveling the global economic order, pushing the world into a new era of uncertainty as July 9th approaches. This date is the deadline set by Donald Trump to implement new tariffs. Claudio Borio, head of the Monetary and Economic Department at BIS, further emphasizes that markets are underestimating systemic risks.
Economic Indicators and Their Implications
In the first quarter of this year, the US GDP fell by 0.5%, surpassing expectations of a 0.2% decline, and private consumption – which accounts for over 68% of the GDP – contracted by -0.1% in May, marking its first decrease since January. Simultaneously, personal incomes dropped by 0.4%, and exports fell by 1.3%. The underlying index of consumer prices increased by 0.2% in May, exceeding expectations, and the overall index rose by 0.1%. Annualized, the underlying index was at 3.4%, and the overall index at 3.1%, both surpassing the Federal Reserve’s 2% target.
Mexico’s economic situation remains grim. The World Bank has slashed its growth forecast for 2025 to a mere 0.2%. In May, general inflation reached 4.42%, the highest in eight months and exceeding the Banco de México’s target range of 3% ± 1%. The Bank of Mexico responded by reducing its benchmark interest rate by 50 basis points to 8.0% on June 26 in an attempt to stimulate growth, but further reductions will be constrained by inflation concerns.
The Mexican peso has strengthened against the US dollar, closing at 18.82 per dollar on June 29. However, this appreciation is due to the weakening of the dollar rather than Mexico’s economic strength. A stronger peso makes Mexican exports more expensive, with exports to the US falling by 2.1% in April and 1.7% in May.
Remittances, a crucial source of income for many Mexican families, have shown signs of decline. In April, remittances totaled 4,761 million, a 12% decrease from April 2024, the largest drop since September 2012 when they fell by 19.6%. Should unemployment in key US sectors, such as construction and services, continue to rise, along with potential taxes imposed by the US Congress, remittances are likely to decrease further. Maquiladoras are also reducing their workforce, and foreign direct investment dropped by 8.6% in the first quarter compared to the same period last year, totaling 11.3 billion US dollars.
Policy Responses and Recommendations
Claudia Sheinbaum, head of Mexico City’s government, has wisely decided to trim the deficit from 5.9% to 3.9%, implying necessary cuts. Critics from the PAN and PRI parties have voiced their disapproval, yet they failed to implement required fiscal reforms when they had the chance.
Facing the Risks of Stagflation
Key Questions and Answers:
- What is stagflation? Stagflation refers to a situation characterized by slow economic growth and rising inflation, creating a challenging environment for policymakers.
- What are the key challenges faced by Mexico and the US? Both countries face exposure to external factors, inflationary pressures, and a lack of structural reforms. Mexico’s additional concerns include a weakening currency and declining remittances.
- What actions should individuals take? People are advised to safeguard their employment, avoid unnecessary debts, review fixed expenses, and refrain from assuming stable currency or price conditions.
- What measures should businesses consider? Companies are encouraged to prioritize liquidity, reduce exposure to variable interest rates, review currency hedges, and adjust portfolios for prolonged periods of high volatility.
In this context, adaptation is no longer optional; it’s urgent. The traditional pillars of stability no longer provide guarantees, and both sides of the border face the real risk of stagflation – slow growth accompanied by inflation.
