March 25, 2024

Hi everyone. My name’s Taylor St. Germain with ITR Economics, and welcome to this edition of TrendsTalk. We at ITR Economics are your unbiased and apolitical source of economic intelligence. Today, I wanted to take a step back and talk about the global economy. We’ve been focusing US specific in the last few episodes, so I wanted to take a step back and talk about some global trends that we’re seeing develop in the data as we sit here in early 2024. Now, the very first thing I wanted to call out is, who makes up the largest part of the global economy? Well, at the end of 2022, the US was about 25.4% of the overall global economy, still the number one economy in terms of size in the global landscape. Now, coming in at number two is China at 17.9%, and then it gets much closer after you exclude the US and China. The US and China are the top two far and away and number three is Japan at 4.2%, then Germany by 4.1%. You see India and a lot of the other EU countries follow in that low single digit percentage.

In terms of the overall makeup, if you’re looking at the US, China, Japan and Germany, you’re already over 50% of the global economy when we look at the world economy by GDP. We have to factor in when we’re forecasting the global economy, all of these different countries and some of the nuances that come along with the economic environments in these countries. One way that we forecast the global economy is by looking at a data series called World Industrial Production. For these countries that are reporting industrial output, they’re all aggregated into one data set and we forecast that data set forward out three years like we do with many of our other data sets. Now, you’re all very familiar at this point with US industrial production and this mild downturn that we’ve been calling for in 2024, which is still the case as we sit here today. But it’s not just the US that’s going through some weakness in 2024, we have the whole global economy contracting in terms of a year over year growth rate as we look at 2024 compared to 2023.

Now, there has been times in the past where US industrial production has moved into a recession when the global economy has not just slowed down and didn’t actually experience that contraction. So I’m getting more questions lately of, “Well, is this just a US phenomenon? Is this a global phenomenon in terms of the weakness in ’24?” It is a global phenomenon, again, as we have that annual growth rate for world industrial production contracting in ’24. So when we compare ’24 to ’23, we do expect negative growth rates for world industrial production. Now again, we expect that downturn for the global economy to be mild, low, single digits in terms of that level of contraction. And then as we look out to ’25 and ’26, similar to the US economy, we see the global economy in terms of the world industrial production growing in ’25 and ’26. Now, I’m talking on a high level, right, I’m talking about this big aggregated data set.

If we get more granular with this data and look at some of the performances of different regions of the world, it becomes more clear where some of this weakness is. As we sit here today, for example, if you look at Canada industrial production is down 0.6% already in phase D recession on an annual growth rate. We see Mexico has transitioned to slowing growth, still positive, up 3.5% compared to the same time last year, but slowing in its pace of rise. And then if we look at Western and Eastern Europe, they’ve actually been in phase D recession for a couple of quarters now. I would say it’s safe to say that we’re seeing greater weakness from Western and Eastern Europe, especially as they deal with geopolitical conflicts, higher levels of inflation. There’s challenges that have been apparent in Western and Eastern Europe over the past few quarters, and as we sit here today, we still have Western and eastern Europe down about 1.6 and 2.6% year over year respectively still in that phase D recession.

I think it’s very clear when you look at a lot of these regions of the world, we’re either slowing down or already in that recession territory, which again, this is not just a US phenomenon in terms of some of this weakness in 2024. When we look at a country like China as well, the growth rate’s positive at 4.4% year over year, and we would expect these low single digit growth rates in China’s industrial economy to continue as we progress through ’24. Even in ’25 and ’26, as the global economy recovers, we have China performing slightly better, but still in that low single digit territory. All in all, there’s weakness that’s showing up in the current data. We expect the data to continue to either decline or slow as we progress into 2024. Though there’s a rebound in ’25 and ’26, certain areas of the global economy will be experiencing much lower growth rates than they have in the past.

Now, when we think about the global economy, there is one trend that I’m often asked about, which is, despite some of this weakness that we’re seeing in the US and other areas around the world, what about this on shoring and reshoring trend impacting the US economy? There was two data points I wanted to call out there. Again, first, the industrial production is essentially about to cross below zero and enter phase D recession. Now, what’s really interesting about this is a data series that lags behind, which is US private manufacturing construction, despite industrial production being essentially flat, about to be down, about to cross below zero, manufacturing construction in the US is up 68.2%. Some of that growth, that really attractive growth rate is due in part to supply chains coming back on shore. Some of the lessons we learned from the pandemic in this reshoring initiative as businesses come back to the US to shore up the supply chains.

Now, I’m not saying that all of that 68% is reshoring or on shoring, but a significant portion is as this data set would capture, for example, a lot of the semiconductor investment that we’ve seen back in the US, which again is part of one of those reshoring initiatives. As we think forward to the second half of the decade, we would expect this on shoring/reshoring or maybe call it overall nationalism trend to continue here in the US. So yes, do we have some weakness in the US and around the world in 2024, we sure do. But when we look at the next five years really leading up to the 2030s when we expect the next economic downturn, we see a lot of attractive growth in the US as these supply chains are coming back on shore. When we look at the overall summary of what I’m saying here, there’s risk moving forward in this global economy. Everyone’s expected for some weakness in 2024 with world industrial production being down.

But there’s areas that are more concerning than others when we look at Western and Eastern Europe having been down, when we look at some of the risks with China moving forward. Now again, ’25 most regions of the world will be growing once again, especially Europe, who is going to welcome those positive economic growth rates in 2025. But again, understand that we at ITR economics believe nationalism is this long-term play. We expect that the US will continue to be a great bet moving forward despite some of the weakness we’re forecasting for this year.

There’s a lot to unpack when it comes to reshoring/onshoring and government investment. We’ll continue to unpack that here in episodes to come. But as a reminder, use some of this slower period in ’24 to be preparing for the second half of this decade because we’ll all find ourselves a lot busier throughout the coming years. I certainly hope you found this information helpful. Please remember to like and subscribe to TrendsTalk wherever you listen to your podcast. I’m your host, Taylor St. Germain. Thanks for joining me on this episode and I look forward to seeing you all on the next one.