December 30, 2022

Hi, I’m Brian Beaulieu, CEO and Chief Economist of ITR Economics. Thank you for joining me for this edition of TrendsTalk. We’ve talked previously about the recession we think is coming for late 2023, and how the downturn will encompass most, if not all, of 2024, here in the US. Now, I wanted to broaden that out a little bit more for you. We’ve taken a look at Europe and their very high inflation, resulting high interest rates, their central bank trying to reduce inflation by bringing down the rate of growth in the money supply they use, and we use an M1 version of money to track them. And all the leading indicators, when we’ve put it all together, tells us that Germany, which is currently struggling in terms of building permits and in terms of inflation adjusted retail sales, may be able to see some stabilization. France is in a little bit better position, as is Italy, probably because they have been traditionally less energy dependent upon Russia. But the war is clearly taking its toll on Europe, as is this inflation.

Our outlook for Europe is very much like that of the United States. We think in 2023, essentially a break-even year. We have Europe industrial production up 0.7% for the year as a whole. And that’s, a lot of it, that strength is coming from Eastern Europe, which is holding up relatively well so far. But Eastern Europe will eventually succumb to the pressures that we’re seeing in Western Europe, and the ones that we are experiencing here in the US.

And there’s some compounding issues in Europe that have us quite concerned. Seems like they’re going to be fine with their energy supplies going through this winter, the winter of ’22 and January ’23, but that may not be the case next winter. And unlike here in the United States, we’re seeing real wages in Europe, inflation adjusted wages are declining. Now, that’s even a downside risk to our forecast for 2023, and consistent with our expectations that 2024, like in the United States, will be a recessionary year. Part of that is their internal problems, part of it is the US is a very, very important export market for Europe. In late 2022, Europe overtook China in terms of where we get most of our imports from here in the United States.

So we’ve had to downgrade that forecast for 2024. We’ve raised the forecast for 2025. Very much like what we did with the US, we’ve had to bring that mid-decade recession forecasts forward because the interest rates have gone up higher, sooner, than we thought they were going to be. And despite what the Federal Reserve says here in the United States, it’s not because wages are going up too fast, that’s just silly talk. Our Federal Reserve pushed up interest rates because of their mistakes prior to 2022, now they want to blame it on employers boosting those rates. That’s poppycock. And Europe and rest of the world had to raise interest rates because the Federal Reserve was raising interest rates, not because their circumstances dictated it, per se. We’ve exported a lot of our inflation to Europe, so they’re tied to our economy and our foibles and our strengths at the economic hip, and I’m afraid they’re going to be experiencing the same malaise in 2024.

The next time we talk, I’ll probably talk to you about China because, if the US is soft in 2024, if Europe is soft in 2024, and given that China’s very much an export driven economy, they’re going to have some problems in 2024, beyond what seems to be a Covid issue here for 2023. Stay tuned on that one, but for now, it looks like the world is moving very much in sync as we go through ’23 and 2024.

I’d normally wish you a happy new year, at this point, but given the news I just delivered, that’s probably not appropriate. But you know what? If you’re running a business, just everything in the world you can do to make sure that your business doesn’t participate in the macroeconomic weakness that we see coming. There’s still time for you to do something about it. You manage the microeconomics, you live with the macroeconomics. Power on. Thank you very much and I hope you do have a prosperous 2023.