MACRO
by Ilya Spivak
Macro Moves in 2024 Mexico is looking up, China down, and recession risk is “on”
rich-world consumers. Its share of worldwide trade volume has fallen to 12.7% from 15% in a mere three years. For the United States—which became China’s largest trading partner in 1998—a deepening rift over Beijing’s increasingly assertive geopolitics and Washington’s newly bipartisan appetite for mercantilism has spurred a search for alternatives closer to home. Mexico looks to be the prime beneficiary of this pivot.
Mexico’s time has come
Shifting supply chains from China to just INVESTORS MAY LOOK BACK on 2023 as a year of macro-driven market volatility. A series of events sure to cause whiplash began in March when the failure of Silicon Valley Bank plunged credit markets into crisis. Wild swings continued past mid-year as U.S. debt-ceiling woes abated but stubborn inflation prompted central banks to raise interest rates. Then tragedy struck in October as war broke out in the Middle East. What pitfalls lie ahead in 2024 is unclear. Nevertheless, here are two themes to keep in mind as the new year approaches: Mexico will strengthen its position as America’s biggest trading partner, and stock prices will be in danger from the threat of global recession and a possible debt debacle.
Failure to recover
China may never bounce back completely from the economic setbacks caused by the COVID-19 pandemic. Data from the purchasing managers’ index (PMI) documents the decline. COMPOSITE PMI: CHINA REOPENS INTO SLOWDOWN
MAY 2021
70 65
—— US
—— EUROZONE
MAR 2023
55 50 45
2311/12_trades_macro.indd 58
DEC 2022
35
Investors dreamed of a splashy recovery in the world’s second-largest economy as China began to scrap “zero-COVID” lockdowns in December 2022. Meanwhile, the end of the Federal Reserve’s cycle of interest rate hikes came into view, so a lucrative 2023 seemed likely. But that misplaced optimism soon dimmed. China didn’t shake off its pandemic restrictions until more than a year after its main customers in the U.S. and Europe. By then, China’s clientele was busy switching to other supply chains. Those markets had also come down from a pop of sharp catch-up economic growth linked to their own reopening, exhausting most of the stimulus money left in consumers’ pockets. Combative central banks’ efforts to force down inflation didn’t help, either. 58
- - - CHINA (CAIXIN)
JULY 2021
60
40
CHINA’S LOSS, MEXICO’S GAIN
—— CHINA (CLFP)
30 May 20
Sep 20
Jan 21
May 21
Sep 21
Jan 22
May 22
Sep 22
Jan 23
May 23 SOURCE:
China loses plum position
As 2024 approaches, a brief upswell in the service sector has unraveled and economic growth has stalled. Growth in real gross domestic product (GDP) has ominously outpaced nominal expansion for two consecutive quarters, suggesting a yawning deflationary gap of close to 1.5%. That points to anemic economywide demand. The way back to prosperity looks tenuous. China may have suffered lasting damage to its role as the go-to middle step in the global supply chain—the place where raw materials become finished goods and are shipped to
Sep 23
Bloomberg
south of the U.S. border offers a slew of benefits beyond sheer proximity to consumers. Mexico’s largest population cohort is aged 10-25 years old, while China’s is 30-55 years old. Mexico’s birth rate is over 1.4 times higher. It spends 4.3% of GDP on education to China’s 3.6%, and its pupils are in school for an extra year on average. Meanwhile, a whopping 42% of Mexico’s population lives below the poverty line. Put all this together and Mexico offers a younger, faster-growing and possibly more educated workforce at a lower price than China. Also, the U.S. and its southern neighbor already have a free trade agreement, making cross-border business comparatively easy and
LU C KBOX
12/21/23 6:19 PM
