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GDP: Strength in North America

September 23, 2022

In a slowing global economy, we have seen some strength in North America. What opportunities could this provide your business? Tune in to the latest episode of TrendsTalk with ITR Senior Forecaster Connor Lokar to find out. 




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The below transcript is a literal translation of the podcast audio that has been machine generated by Rev.



Hello, everyone. This is Connor Lokar, Senior Forecaster with ITR Economics, checking in for another TrendsTalk. Today, we're going to be talking about the strengths of North America in what is, right now, a slowing global economy. I think most folks are aware at this point that the global economy is slowing down. If you're not, spoiler alert, I suppose. We are seeing global industrial production is decelerating. We are seeing that rates of growth generally across the entire global economy are coming down. And as always in these global cycles, whether they're of growth or in this case slowing growth and potential decline in some geographies, there are going to be winners and losers. In our estimation, one of the relative winners, or at least one of the better-looking areas in the entire global economy for this cycle, is North America.

When we look at the global economy, we see that it has been decelerating since the midpoint of the first quarter. That is also a true statement for us here in the United States and, by and large, the rest of the world. But what we see are definite shades of gray occurring across the global economy. And a lot of signals showing that North America is actually poised to be a pretty good spot to be for this particular cycle. So if you are maybe a globally-inclined manufacturer or distributor of goods selling not just in the United States but around the world, we should do a little bit of a temp check on what we see elsewhere.

Now, I think first worth identifying is Japan. Japan is still, after all, the third largest economy on earth. And Japan is in a recession, folks. No one seems to be talking about it, but Japan's economy is actually contracting from an industrial production standpoint as we start to round out the third quarter and head into the fourth quarter of 2022. In the last 12 months, Japan is averaging 0.6% below the same level of industrial output sustained during the same 12-month period one year prior.

If we look at our quarterly trending, it's actually even worse than that. We see that Japan is contracting at a two and a half percent rate relative to the same three-month period last summer. Now, Japan we've talked about in the past in various capacities. Obviously, they have some demographic issues that they have been grappling with for over a decade at this point, chiefly that their population level is declining. And we know that that has a particularly important impact on economic growth, and we see it to the negative here. So when I look at Japan, that's an area that's struggling relative to the global trend at the moment.

Next on the list, we look at Europe. I think everyone's well aware at this point that Europe is going to have some problems this cycle. ITR is forecasting, and has been, that Western Europe industrial production is going to go into outright recession this cycle. That'll include Germany and other folks. In Western Europe, as we're well aware, of there are energy issues as we continue to evaluate the fallout from the Russian invasion of Ukraine. And as it turns out, a rather important leg of the stool for not just German manufacturing but all of Western European manufacturing was essentially limitless and very cheap Russian natural gas.

And when those spigots get tightened, we need to look no further than PPI outcomes for Germany and other Western European economies that are racing, screaming higher and higher. So we are going to see a rather dark winter here for Europe given some of the energy scarcity, energy price issues. I know in some discussions with my own clients here that we do forecasting for at ITR, that when their natural gas hedges expire at the turn of this calendar year moving to 2023, that is going to put them in a very imperiled position for 2023 as they're going to have struggles competing from a global standpoint.

Europe is poised for recession, and certainly we would move towards the bottom of the list in terms of economic outcomes for this cycle. Now China's data is somewhat opaque, I'll call it. It is always difficult to get a read on. But certainly with some corroboration from our client base, China is struggling to get out of the stopping and starting the commitment to COVID zero, the commitment to lockdowns. They open up, and then they lock back down. The China data that we see doesn't look all that bad for right now. But relative to Chinese standards for economic growth, yet again, poises to underwhelm to a certain degree this cycle.

Now, when we look at the North American economies, however, we see some very good things. We see that Canada is growing at a 4.1% growth rate on an annualized basis. On a quarterly basis, even stronger than that, up 5.6% in the most recent quarter relative to the same quarter a year ago. That's a 3/12 rate of change for those of you well-versed in ITR nomenclature. And that trend, folks, on a quarterly basis is rising. Canada obviously does well in high, or relatively high anyway, energy cost environments. We're also seeing that Canadian metals production is doing quite well as the commodity superstore that is Russia, and to a certain extent Ukraine, has obviously been complicated by both sanctions and military interruption.

That's putting Canada in a pretty good spot. Mexico also doesn't look quite as robust, but does look quite solid when we look at an annualized growth rate of 2.8% on a quarterly basis and even stronger quarterly growth rate of 3.3%. Again, another trend in phase B looking very good. And of course the big dog, the United States, nearly a quarter of global economic activity. We're seeing no signs of stress, folks, in that US industrial production trend for the United States. We are reaching into all time highs on a three month moving average basis.

We see a very comfortable annual rate of growth of 4.3%. And just below that on quarterly basis, at 3.6%, it would appear that North American manufacturing, folks, is poised to do, at least relatively speaking, well for this cycle. Obviously we're going to see some complicating factors from the fed and we will let you know what we see out of that here this fall. But for now it would appear that, folks, there's not going to be many better places to be than North America for this cycle. ITR, we are believers in the on-shoring or at the very least near-shoring trends that we have been seeing. Obviously we've seen some fraying on the margins of that China, US supply chain and some Southeast Asian supply coming back to if not the United States then to North America more broadly. And now, at least in my view, I think we now have an Eastern front opening on the re-shoring trend if we see a long term embedded higher energy cost for Western Europe as an outcome of whatever resolution, if we can ever get to one, for this Ukraine Russian conflict.

That could also drive some European manufacturing, maybe displacing that back to more in market or near market solutions here in North America with a relatively lower energy cost basis. So folks, we're not going to be perfect here in North America. We are not going to avoid a deceleration, because it is happening. But if we go back to that shades of gray analogy, it would appear that the United States and North America looks like a pretty darn good place to be for this economic cycle. So you need to think about if you are selling all over the world, or at least all over North America, thinking about where are we, what can we expect in terms of rates of growth from our various geographies as we go into our 2023 budget forecast and planning process. And see if we're doing some business here in North America, can we maybe do a little bit more in 2023? Because it appears these growth rates are going to hold up relatively well compared to some other places on Earth. So with that, thank you for stopping by and we'll see you on the next one.


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