2024 with Logistical-Economic Update and Its Potential Impact on Mexico

#### Eurozone logistics growth is recovering In the logistical-economic sphere, the eurozone is not strong, but is clearly recovering from a near recession last year. This is the inference that can be drawn from the publication of second-quarter GDP data last week. The European Union (EU) reported that real GDP in the 20 eurozone members increased 0.3% from the first to second quarter, the same as in the previous quarter. Real GDP rose 0.6% compared to the previous year. Let's recall that in the third and fourth quarters of 2023, real GDP did not change in quarterly terms. #### Germany's Economic Challenges: How GDP Weakness Affects Eurozone Growth Second-quarter growth in the eurozone was hampered by Germany, where real GDP decreased 0.1% from the first to second quarter. In two of the last three quarters, Germany's real GDP has decreased. The German government said the weakness was due to a drop in business investment in equipment and structures. Investment in Germany has been hampered by several factors, including relatively high energy costs, weak demand in China, weak domestic demand, and intense competition from China and the United States. Meanwhile, other eurozone economies performed better. In Spain, real GDP increased 0.8% from the first to second quarter. This followed 0.8% growth in the first quarter and 0.7% in the fourth quarter of 2023. In other words, Spain's economy is booming. The Spanish government reported that all major components grew strongly, including consumer spending (0.3%), investment (0.9%), and exports (1.2%). It reported that Spain's unemployment rate has fallen to the lowest level since 2008. Meanwhile, Spanish inflation has slowed, largely due to falling electricity prices, which likely helped consumer spending. #### **Eurozone inflation could be stagnating** Until very recently, there was a strong expectation that the European Central Bank (ECB) would cut interest rates in September. However, after the publication of July inflation data, it is a bit less certain. Rather, the modest acceleration in overall inflation suggests the possibility that the ECB will wait a bit longer. Let's look at the data. The EU reported that, in July, consumer prices in the 20 eurozone members increased 2.6% compared to the previous year, an increase from 2.5% in June. Additionally, overall inflation appears to have stagnated. It was 2.6% in February and as low as 2.4% last November. However, prices did not change from June to July, which bodes well for a reduction in annual inflation in the coming months. When excluding volatile food and energy prices, underlying prices increased 2.9% in July compared to the previous year. This is the same rate of increase as in March, May, and June. As such, inflation appears to have stabilized at a level higher than the ECB's 2% target. Still, underlying prices fell 0.2% from June to July, indicating shorter-term progress. All this leads to ECB decision-making. On one hand, overall inflation is at a desirable level while Europe's largest economy (Germany) remains very weak. Additionally, monthly inflation data in July were quite favorable. #### **Bank of Japan action leads to strong increase in yen value** In the past year, much has been written about predictions of when the Bank of Japan (BOJ) would begin to significantly tighten monetary policy, especially since Japanese inflation has been at its highest in 40 years. Now, the time has come. The BOJ raised the benchmark interest rate from 0.10% to 0.25%. This followed an increase in March from -0.1% to 0.1%. Additionally, the BOJ announced it would halve the pace of asset purchases. While investors expected a change in asset purchases, they did not expect the increase in the benchmark interest rate, according to an investor survey. As such, they reacted strongly by increasing the yen's value. In recent days it reached near 148 yen per US dollar, having bottomed out just weeks ago at 161 yen per dollar. This is a significant change. For now, there is probably a widespread expectation of future rate increases by the BOJ. There is also a widespread expectation that the US Federal Reserve will begin gradually cutting rates in September. Unless either central bank's actions differ from current expectations, there is no reason for further yen appreciation. Of course, unexpected events could alter currency values. #### **What impact will a stronger yen have?** First, a rising currency can be disinflationary, which is precisely what the BOJ wants. In fact, Ueda said the exchange rate was a factor in the BOJ's decision. Second, a higher yen will reduce prices of imported goods, which will likely increase Japanese households' purchasing power. Third, a higher yen could reduce export competitiveness. Fourth, if investors expect further rate increases and/or an increase in the yen's value, this will likely suppress carry trade. #### **China's currency is internationalizing, but not much** China aspires to internationalize its currency, the renminbi. Internationalization means the renminbi would be frequently used as a transaction currency, as a store of wealth for foreign citizens, and as a reserve asset for major central banks. For China, the benefit of internationalization is that it reduces exchange risk for Chinese exporters and importers. Additionally, it grants China soft power in its relations with other countries. For the United States, dollar dominance has been called an "exorbitant privilege" that reduces borrowing costs for the US government and its citizens. It also allows the US government to restrict dollar access as a weapon in international relations. China is eager to avoid this tactic by the US government. Looking forward, China's government is expected to continue promoting the renminbi, including through negotiating currency swap agreements with emerging country governments. However, it seems unlikely that the renminbi can challenge the US dollar's role in the short term. This is because China continues to maintain capital controls. This allows China to fix the currency's value and maintain interest rates at a lower level than a free market rate. This is sometimes known as financial repression, carried out to allow favored companies to borrow at low cost, even at the expense of low returns for holders of renminbi-denominated assets. Unless China is willing to eliminate capital controls, the renminbi's role will likely be limited. #### **China's raw materials imports: a notable slowdown** In July, China's imports of major raw materials continued to lose momentum, with crude oil arrivals falling to the lowest level in nearly two years, while those of iron ore, coal, copper, and natural gas remained largely stable. The striking headline in Wednesday's official data release was the drop in crude oil imports to 9.97 million barrels per day in July, the lowest daily figure since September 2022. China, the world's largest crude importer, has seen arrivals fall this year, with imports of 10.90 million barrels per day in the first seven months of the year, 2.9% less than the 11.22 million barrels per day in the same period of 2023. Crude oil imports have decreased by about 320,000 barrels per day in the first seven months of 2024, a figure that contrasts sharply with demand growth forecasts from leading industry groups like the Organization of Petroleum Exporting Countries (OPEC) and the International Energy Agency (IEA). OPEC's July monthly oil market report maintained the group's forecast that China will lead global demand growth this year, with an increase of 760,000 barrels per day. #### **Stable Imports** Iron ore imports were 102.81 million metric tons, a 5% increase compared to the 97.61 million recorded in June, but in daily terms, July arrivals were 3.32 million tons, barely higher than June's 3.25 million. They were also in line with May's 3.29 million tons per day, and below April's 3.39 million. The overall picture for China, which buys approximately three-quarters of the world's seaborne iron ore, is that imports of this key steel raw material are stable, with little variation in recent months. This despite the benchmark futures price on the Singapore Exchange trending downward from its high of $143.60 on January 3, to close at $102.66 on Tuesday. * Unrefined copper imports showed a similar trend to iron ore, with arrivals of 438,000 tons in July, barely above June's 436,000. But in daily terms, July arrivals were 14,130 tons, below June's 14,530. * For natural gas, imports of liquefied natural gas and pipeline supplies in July were 10.86 million tons, equivalent to 350,300 tons per day, while in June arrivals were 10.43 million, or 347,700 per day. In May, natural gas imports were 365,500 tons per day and in April they were 343,300 per day. * The possible exception to soft raw materials imports is coal, where July imports of 46.21 million tons were the highest since December. But even with coal, daily figures show a relatively stable pattern, with July's 1.49 million tons being the same as in June. Coal imports in May were weaker, with 1.41 million tons per day, but April's were stronger, with 1.51 million. Putting the import data together shows that arrivals of iron ore, copper, natural gas, and coal have been largely stable in recent months. #### **Potential Impact on Mexico** Mexico, being an open economy highly dependent on international trade, can be influenced by these global dynamics in several ways: * Eurozone Growth: Economic recovery in the eurozone, especially in Spain, could benefit Mexican exports to this region. Mexican companies that export goods and services could find a more receptive market as demand increases in Europe. * ECB Monetary Policy: ECB decisions on interest rates can affect investment flows toward Mexico. If the ECB decides to maintain or reduce rates, it could increase the attractiveness of emerging markets, including Mexico, for European investors seeking higher returns. * Strengthening of the Japanese Yen: A stronger yen could impact Mexican exports to Japan by making Mexican products more competitive compared to Japanese ones. However, it could also make imports of Japanese products to Mexico more expensive. * Renminbi Internationalization: Although the immediate impact is limited, the growing internationalization of the renminbi could open new opportunities for trade and investment between Mexico and China, especially if more currency swap agreements are established between both countries. * Chinese Raw Materials Imports: The slowdown in raw materials imports by China could have a mixed impact on Mexico. On one hand, it could mean lower prices for Mexican consumers of products imported from China. On the other hand, Mexican companies that depend on raw materials exports to China could face challenges if Chinese demand continues to weaken. Current global economic trends present both opportunities and challenges for Mexico. Companies and the government must be attentive to these developments to adapt and take advantage of opportunities that arise, while mitigating potential risks.