February 24, 2023

Hi, this is Alan Beaulieu from ITR Economics, and I’m happy to talk with you today about the world, kind of a big subject. We’ll make sure we get it done in the next three to four minutes, don’t you worry. I want to start with where we’ve been. And our preliminary forecast results for the globe are on the screen now. What I’d like you to catch is the duration column first. That’s how many months the forecast had in place. For instance, with the world, that means that we had data that was available through November 2021. So that by the end of 2022, the forecast would be in place for 13 months.

And you can see on down through the list, the right-hand column, the accuracy rate. Now, why am I showing you that? Two reasons. We hold ourselves accountable here at ITR. We’re transparent. If we don’t have a good forecast, we show you. If we have a good forecast, we show you. And this is part of the list that we go through here at ITR. And the other reason is because I want you to have confidence in the forecasts we’re going to be talking about in the next few minutes.

Now, they all have something in common. And whether we’re talking about the world industrial production, which you can see here, we had a strong accuracy rate on. Or whether we’re talking about Japan or Germany, individual nations, of course, and they’re the third and fourth largest nations on the planet. Whether we’re talking about West Europe overall, or Eastern Europe overall, whether we’re talking about Canada or Mexico, it doesn’t really matter. What we’re going to see is that somewhere around the third quarter this year… And it could vary a little bit, but whether it’s June or September. But somewhere around the third quarter, you’re going to see each of these industrial production, 12 month moving averages that I mentioned, reach a peak. And that’s not everything that’s on the list. It’s everything that I just mentioned, going to reach a peak.

Now, some of them are in decline now, like Germany’s in decline now. And it’d be easy to say, “Well, that’s just recession and it’s going to continue. Basically, you’d be right. There’s going to be an interruption. We’re going to see a little rise going on in Germany, and we’re going to see a little bounce, if you will. And as that happens, it’s going to be something that will pull Western Europe with it. And there’s a lot of good things happening at the moment in Europe, and in Germany, because of what’s happening in the world. There’s some positive export information. There’s some demand information. There’s good retail sales activity occurring in most countries. There’s good things to be encouraged about, but it’s not going to last.

Why isn’t it going to last? Because the United States is going to go into recession, as most of you know, from listening to our podcast; reading our blogs; and seeing us at keynotes. And as you talk to your individual economists through EVP deliveries, whatever it happens to be, you already know we’re going to be slipping into recession later this year, and industrial production will. And that that decline’s going to last until late 2024. And it’ll be a slightly milder than normal recession in the United States. Perfectly good. What’s going to happen is the world IP, industrial production, is going to do the same thing. And so will Japan, and Germany, Western Europe, and so will Canada, and so will Mexico. Did you notice I didn’t say Eastern Europe? Eastern Europe’s going to feel a little bit of that, but think mostly flat for Eastern Europe, with a little downward bias, not as much as the other nations.

We’re all joined together. We’re going into recession because, in part, of the Federal Reserve Board. We’ve talked about that on many occasions. I’m not going to hit all the reasons why now they’ve done what they’ve done. But they’ve raised interest rates to the point where we are going to see this mild recession in late ’23 and in 2024. And we’re going to export that to the rest of the world. And we see some interest rate rise going in other countries, but we will be the driver of this.

Other risks of the forecast for 2024, in terms of magnitude, would be if things really heat up in Ukraine. And we find that there is more problems with energy, or food deliveries, or neon, or other things that we’re very dependent upon in other parts of the world that are sourced from there. All of a sudden, we could find ourselves with intermediate good problems, which means final good problems, which means we have more inflation, which means we have less demand because there’s no product available. It’s not so much less demand, but less fulfillment of demand, because there will be less product available. And that could also slow the economy down even more than we’re talking about, and produce a steeper downturn in 2024.

The Federal Reserve Board not relaxing their Fed Funds Rate as we would like, by the middle of ’24, is a problem that we will need to keep an eye on as well. But we’ll keep an eye on them, we’ll let you know. But right now, just expect mild decline in 2024, in the world, Japan, Germany, Canada, Mexico. Overall Western Europe and Eastern Europe, not so much. And as you do so, plan your demand on your business accordingly. Plan how much you’ll be selling into those nations, if you do sell into those nations.

If you’re sourcing from those nations, then understand they’ll be looking at a slower growth economy. And you might use that to your advantage, in terms of pricing, in terms of negotiations, in terms of terms on the purchase. You might find yourself with decreased, and you should find yourself with decreased, container costs as you’re having good shipped into this country. All of which could help your bottom line, even as your top line is facing some downside pressure. You should be able to see some costs ease if you’re importing. And as you do that, hopefully, you’ll be able to meet some balance on your EBITDA. Your labor costs will be going up, but hopefully these others will help you manage that. And to be as sticky as you can be with your own price reductions if they’re necessary at all in 2024.

It’ll be a competitive environment, so you may find this necessary, but with the right competitive advantages, with the right values, with the right product, you should be able to maintain price and margin as we go forward. Thank you for joining me today. See you on the next TrendsTalk.