North America Economic Structure

By: EconomyWatch Content   Date: 29 March 2010

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 The North American economic structure is undergoing recovery in 2010 after being adversely affected by the recession of 2008-2009. Experts believe the pattern of recovery will affect the long term stability of the region. The fiscal policies have been aggressive and are replacing deductions that led to the decline of the economy. The year 2010 will witness stronger than anticipated earnings and an enormous amount of operating leverage that promises to be more apparent as the economy continues to recover. However some risks still remain in the recovery process. Instead of the U-shaped recovery, which many have anticipated following the commencing of growth in 4Q 2009, there is a likelihood of an L-shaped recovery. In addition, risks in the longer term could result from current and future budget deficits. With the enormous amount of accumulated debt in the United States, the country carries risks of inflation, dollar depreciation, higher interest rates, and higher taxes.

North America Economic Structure: USA Fiscal Policy

According to Douglas Elmendorf, director of the Congressional Budget Office, the US federal budget deficit will become unsustainable and would eventually pose significant risks. If the current tax policy is extended, including the cuts administered by the Bush administration in 2001 and 2003, the deficit would increase from its projected $6 trillion by 2020 to $10 trillion.  In addition, public debt with current tax policies would account for a major portion of the GDP by 2020.

North America Economic Structure: Mexico Fiscal Policy

Fiscal deficits are expected to be modest over the forecast 2010 and beyond, largely because stimulus was not relied upon to the same extent that it was in other markets. Still not much of an improvement is projected in 2010. This is because the government has hedged oil sales at US$57/brl in 2010, versus US$70/brl in 2009. Liquidity and solvency indicators do not concern this point. However, there are structural concerns surrounding government finances that could initiate another round of rating downgrades in the coming years (both Fitch and S&P downgraded Mexico in 2009).

 

The greatest concern is the narrowness of the non-oil tax base, which measures only 10-11% of GDP, and the Mexican government’s reliance on oil revenues (roughly 35% of total revenues). This reliance on oil revenues becomes a matter of great concern, given the outlook of falling oil production.


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