A Dimming Outlook

Manuel Balmaseda Chief Economist

Foro Boca, Mexico CEMEX Building Award 2018

A Dimming Outlook

The key issues remain the same as a year ago, with one exception July 2018

Return to “dovishland”

-2-

Recession: when, what and where?

Return to Dovishland

Trade, playing with fire

Political Economy over Economic Policy

Growth slowdown in a noisy environment GDP growth 2019

Recession Source: CX-Economics, Consensus Forecast, Bloomberg

Stagnation

Mild Growth Srong Growth

Recession

Stagnation

Mild Growth Srong Growth

-4-

Growth slowdown in a noisy environment GDP growth 2020

?

Recession Source: CX-Economics, Consensus Forecast, Bloomberg

Stagnation

Mild Growth Srong Growth

-5-

The when, the what and the where

New York Fed recession probability model (12 month ahead)

100%

80%

60%

40%

20%

0% 60 65 70 75 80 85 90 95 00 05 10 15 20

-6-

The when, the what and the where

Eurozone: Activity and GDP

Where?

• Negative surprises: • Germany in recession • EZ slowing significantly • Mexico, Brazil barely growing • US slowing but in line with projections

(% qoq sa) 2

2

1

1

0

0

-1

-1

-2

-2

-3

-3

-4 -5 -6

-4

GDP CX-EZ Activity index CEPR Eurocoin ECONOMIC SENTIMENT INDICATOR 2008

2010

2012

2014

2016

-5 -6

2018

Source: Refinitiv Datastream, CX Economics

-7-

The when, the what and the where

Germany: Manufacturing and Services PMI Index

Where?

• Negative surprises: • Germany in recession • EZ slowing significantly • Mexico, Brazil barely growing

65

• US slowing but in line with projections

50

What?

• Manufacturing recession while services resilient

45

60 Services 55

Manufacturing Aug-19

Feb-19

Aug-18

Feb-18

Aug-17

Feb-17

Aug-16

40

-8-

The when, the what and the where

Where?

• Negative surprises: • Germany in recession • EZ slowing significantly • Mexico, Brazil barely growing • US slowing but in line with projections What?

• Manufacturing recession while services resilient • Wall St. vs. Main St.

Slowdown? For sure (already happening) Recession? Eventually, but no crisis -9-

Recession fears may be exaggerated US GDP (accumulated growth from through ) 60

Recessions 50

40

30

20

Expansions

10

0

Duration

53

58

63

68

73

78

83

88

93

98

03

08

13

(months)

39

24

106

36

58

12

92

120

73

124

Intensity

14

12

53

15

22

4

38

43

18

25

(%)

Source: NBER, BEA and CX.

18

Recession: when, what and where?

Return to Dovishland

Trade, playing with fire

Political Economy over Economic Policy

US at center stage, economics or politics

List of existing and potential tariffs on US imports • Trump following his “To Do” list.

• Impact on global value-chains • US-China, beyond trade • Europe next after China

US exercising its power, to what end?

As conflict spreads, the impact becomes more global Source: US Commerce Department and USTR

- 12 -

Trade war having a global impact

Global trade

Global trade by country: (X+M)/Y

(yoy)

(% GDP, 2017)

7 6 5 4

100

100

80

80

60

60

40

40

20

20

0

0

3 2 1 0

Source: CPB World Trade Monitor

Source: Datastream

US

Ch ina

Ita ly

UK

Fra nc e

Sp ain

are a Eu ro

abr.-19

abr.-18

abr.-17

abr.-16

abr.-15

abr.-14

abr.-13

abr.-12

-2

Ge rm an y Me xic o

-1

- 13 -

Slowing to “normal�, and beyond

Return to Dovishland

Trade, playing with fire

Political Economy over Economic Policy

Central Banks, the return to Dovishland Central Banks’ interest rates (yoy%)

6

• Lower expected rates everywhere

1Y ago forecast Current forecast

5

• Inflation disappoints, again … as growth uncertainty rise

4 3 2

• Market (and political) pressure

FED

1

ECB

• Focus on tail risk, insurance play

0

For how long?

Dec-21

Dec-20

Dec-19

Dec-18

Dec-17

Dec-16

Dec-15

Dec-14

Dec-13

Dec-12

Dec-11

Dec-10

Dec-09

Dec-08

Dec-07

Dec-06

Dec-05

-1

How far (low) can rates go?

• US: 2% growth, 2% inflation and 2% interest rates • EZ: 1% growth, 1.5% inflation and neg. rates

Source: Bloomberg, Banxico - 15 -

Central Banks stimulating demand by any means Transmission mechanism of monetary policy • The expectation and asset price channels, the more active currently in the US

Official interest rates

Money market interest rates

Expectations

• Stimulating demand via governments spending • Demand policies are just that, Demand Policies

Money, credit

Asset prices

Bank rates

Exchange rates

• Asset bubbles vs. Wealth effect • Currency war?

r*: the question is not how low it is but why is it that low and what the implications are - 16 -

What a difference a year makes Spreads in "recession" territory

US yield curve

14

14

12

12

10 yr Bond

10

8

6

6

4

4

2

2

0

0

-2

-2

4

4

2

2

0

0

-2 1985

1990

1995

2000

2005

2010

3.5

10

2 yr Bond 3 m T-bill

8

(%)

2015

-2

3.0

2.5

2.0

LATEST -3M -6M -1Y

1.5

1.0

0

5

10

15

20

25

30

- 17 -

Currency war in the making?

Spreads in "recession" territory

Highest spread ever

14

14

10

12

12

8

10 yr Bond

10

10

2 yr Bond 3 m T-bill

8

US 10 yr rate

6

8

6

6

4

4

4

2

2

2

0

0

-2

-2

Germany 10 yr rate

0 -2 4

4

4

2

2

2

0

0

0

-2 1985

1990

1995

2000

2005

2010

2015

-2

-2

90

95

00

05

10

15

Source: Thomson Reuters Datastream - 18 -

Slowing to “normal�, and beyond

Return to Dovishland

Trade, playing with fire

Political Economy over Economic Policy

Other “stuff” to worry about Brexit

Autocratic leaderships

Financial Excesses: Stocks, Corporate Debt, Sovereign Debt…

Politics / Geopolitics

Brexit, still a ticking bomb

- 21 -

Brexit, still a ticking bomb

- 22 -

A Few Good Men…

- 23 -

Manuel Balmaseda Chief Economist

Foro Boca, Mexico CEMEX Building Award 2018

A Dimming Outlook