Keeping an eye on the world’s economy is important for those involved in cross-border business. But, especially in today’s turbulent and complex environment, it’s an increasingly difficult task. Fortunately, we can look to the leaders who make it their life’s work to keep abreast of this complicated topic and its implications for exporters and businesses in general.
Peter Hall has long been an influential voice in the international business community. He served as VP & Chief Economist at EDC for over a decade. In the FITT Economic Briefing series, Peter explores the current state of the world economy, forecasts and what it all means for today’s exporters.
Here is a recap of the first three installments in the series. For the full picture, watch the videos and be sure to subscribe to FITT’s Youtube channel so that you will be the first to know when there is a new briefing update.
Is forecasting passé? Projections and pandemonium are a strange mix
Released in August, 2023
Chaos is a big theme these days – it appears in books, movies, high-level economic and political discussions, and it has come to permeate our view of things. Whether it’s climate change, technological change, de-globalization, terrorism, populism, pandemics, demographic change, misinformation, corporate ethical issues, IP, AI or the host of other mega-shifts I’ve left off the list, each individual issue is daunting on its own; collectively, they are something of a nightmare.
The shock, persistence and randomness of these issues has led many to conclude that it’s not really possible to see the future, that the models of the past are broken. That’s probably true if everything has changed. But everything hasn’t changed.
The traditional business cycle is still relevant
We still talk the business cycle and its four phases: growth, peak, recession and recovery. All of these terms are still in our business vocabulary, and still active in reality.
What’s confusing about today’s business cycle is that it doesn’t seem to be following the same cadence as in the past. In recent history, we could count on a recession happening roughly every 10 years. However, dating back to the early 1980s, the world has undergone significant positive shocks that have increased our collective capacity to grow. Things like computing power, telecommunications, the rise of emerging markets, globalization, and myriad related factors and applications have revolutionized and set whole new limits to our growth potential.
It’s really hard to argue that in the big, driver economies there is clear evidence of pre-recession excesses. In fact, there is ample evidence of the exact opposite – a massive anti-bubble of pent-up demand.
If you don’t agree, you’re in good company – but try these arguments on for size: first, the COVID-19 policy-induced recession simply deferred a lot of intended spending. And the money is there for it, from incomes that were just banked to paid-out but unspent stimulus money. Second, prolonged sluggish growth created a huge groundswell of pre-pandemic pent-up spending. Third, at the same time, Americans vastly reduced their personal debt levels. Fourth, the 2008 housing disaster, most evident in the U.S. market, brought chronic underbuilding that created a big supply-demand gap that will take years to fill. In the U.S. and Europe, housing is on the up and up. No wonder the Fed is finding the inflation battle hard.
Canada and the U.S. are facing different scenarios into 2024
Ditto for Canada? Sadly, no. Soaring consumer debt and poor housing fundamentals will not respond well to aggressive interest rate hikes. This, together with higher consumer prices will ensure that Canadian consumers are tighter with their cash. Avoiding a significant domestic recession will be very difficult for Canada to do.
This time around, Canada’s exporters will get a free pass. The relative strength of our key trading partners will likely shift business interest more to an export focus – by extension, heating up demand for international trade expertise.
Not only will exports partly offset the domestic malaise, but that same domestic weakness could well free up labour and plant capacity for the export sector – it’s actually a good moment to keep an eye open for talent that’s currently being shed in the high tech, financial services and skilled-trade firms that primarily serve the internal economy. It’s also a good time to be on the lookout for strategic investment plays.
Here’s the deal
Forecasting is alive and well, if the impact of structural changes is properly understood. Data and cyclical fundamentals together show that the global economy is stronger than news reports have indicated. This will help it to absorb higher interest rates without drastic fallout, and to continue growing for a number of years to come. To do this successfully, more capacity will be needed to deal with rising demand. That will be good for Canadian exports, Canadian business investment, and skilled international trade professionals.
Is Inflation Going the Wrong Way? Analysts say more rate hikes ahead
Released in September, 2023
As you know, businesses, exporters and consumers have already paid a huge price in the Bank of Canada’s inflation fight. The sharply higher cost of borrowing has hit us from all angles – personally, in business investment projects and working capital needs, and in business flows.
Haven’t rate hikes gone far enough? Why aren’t they more effective? What about core inflation?
That’s all the Bank of Canada cares about, right? Partly right – in an inflation fight, they’re looking at everything.
What wasn’t discussed in immediate news flashes over the past few months is that certain key groups in the CPI basket are either deflating or in disinflation territory. Take household operations, furnishing and equipment, for instance. It’s a category that accounts for almost 15% of the CPI basket, and has fallen by an average of 0.5% per month for the past three months. That’s an annualized drop of 5.9%, a pretty serious tumble. Guess what – this category isn’t alone. Clothing and footwear tumbled by 2.8% in the past two months alone. Meanwhile, health care costs have flatlined. Add it up, and about a quarter of the basket is really hard-hit.
Still a lot of interest costs pain ahead
This sure complicates the budgeting process. Businesses are struggling with irrepressible energy and transportation costs, critical for international trade, and a softening domestic market that’s putting downward pressure on selling prices. Weak producer prices are a mixed blessing; input costs are muted, but those selling intermediate goods are in a squeeze.
Monthly increases in mortgage interest costs are still rising at a double-digit pace that has persisted for 14 months, and is almost sure to continue for some months to come. In July alone, growth was at a 24% annualized pace. The pace was actually higher a few months back, but today’s growth is on top of previous gains and is almost sure to barrel on in the coming months. For interest costs, there’s still a lot of pain ahead.
Is the cure worse than the disease?
Now wait a minute; when we’re talking about inflation from interest rate hikes, isn’t that inflation that’s sort of caused by the Bank of Canada? Well, I’m afraid so.
This is one of those strange situations where fighting fire with fire is the remedy. But if that’s the case, shouldn’t the measure of success be the price path of everything but mortgage interest costs? That is, are the fires that are being intentionally started helping us conquer the original fire? Seems reasonable.
That should be easy; mortgage costs are hefty, so tackling what remains should be easy, right? Not quite; hard as it may be to swallow, the weight of mortgage interest costs in the the entire 2022 CPI basket was just 3.46%. But don’t despair; multiply that by the 30.6% year-on-year growth in this category and you add a full percentage point to headline CPI!
Here’s the deal
Monetary policy remains a delicate dance. Rate hikes to date will still be biting down hard on the economy well into next year. Spurious and fleeting price changes will doubtless complicate the exercise, but the Bank’s potion seems to be working. As we’ve seen in the past, too much is lethal.
Navigating Near-shoring: Tempering enthusiasm with caution
Released in November, 2023
It seems everywhere there’s business-talk, near-shoring is one of the key topics. Whether in keynote presentations, strategy meetings or side-bar conversations, there’s lots of buzz.
While serious talk of near-shoring is nothing new, springing to life with SARS-1, business-arresting weather and seismic events and the Global Financial Crisis of 2008, it really took the COVID-19 pandemic to kick it into tangible action. In investment-speak, that’s pretty recent.
It takes time to actually get shovels in the ground, but that seems to be happening in spades in 2023.
What does this mean for exporting businesses in Canada?
Many are welcoming this enthusiastically. They see new investments coming in, with employment opportunities, ribbon-cutting ceremonies and of course tax dollars to follow. And if they’re not coming here, well, they’re setting up shop in a ‘friendlier’ location. Supply chains are more secure. Shipping will be more predictable, and require shorter lead times. In short, it’s much more about us, and it’s keeping the so-called ‘bad guys’ out. But is it all positive?
6 key near-shoring challenges for exporters
Unfortunately, there are a good few things to watch out for:
- Higher costs
Let’s face it, under globalization, business was organized internationally to minimize costs. Competitive pressures ensured that businesses would make cost-efficient decisions. It’s logical, then, that unwinding this process will result in higher-cost production. The timing isn’t great, as we are already dealing with the first serious inflation outbreak in 31 years. Exporting businesses will have to factor this into their plans, and will have to be creative to remain competitive.
- Labour shortage
New domestic investments will require workers, and these – at least in Canada, the U.S. and Western Europe are in short supply. As such, these new operations will likely bid up the cost of labour, which no doubt will seep into our own organizations, magnifying wage pressures that are already present.
Canada’s acute shortage of skilled labour also suggests that new investments may well poach skilled labour from existing operations, compromising production from existing facilities, and again, adding to wage pressures for skilled workers.
The timing of new investment activity isn’t great, as it’s clashing with the recent spike in interest rates. While we may welcome all of this new activity, the cost of what it produces will likely have to factor in increased borrowing costs.
You may be happy that a key part of your supply chain is moving closer, say from China to Mexico. If you haven’t dealt with Mexico-based businesses before, there’s likely a lot to learn about transactional, taxation and logistics issues, among other things. And even if you are familiar with the new market, there may well be differences that relate to the nature of the goods and/or services in question.
- Are potential partners really near?
Near-shoring has created a wave of investments from offshore suppliers, in an attempt to be treated as local content. China is particularly active, with anecdotal evidence suggesting strongly that it is investing in North America, especially Mexico, and in places like South Korea which have preferential trade agreements with the U.S.
This new investment is generally being welcomed by the recipient jurisdictions, but if in U.S. policymakers’ eyes this is ultimately viewed as a violation of the spirit of near-shoring, then these investments – and those supplied by them – may well find themselves on the wrong side of Canada’s top customer. With this in mind, remember that USMCA is up for renewal in 2026.
- Politics vs business
Businesses make investment decisions based on long-term dynamics, given the amounts being committed and the need to generate shareholder value. Politics is often on a shorter horizon, and can be fickle. When it finally dawns on consumers that they will ultimately pay the bill for this, in addition to current inflation pressures and higher interest rates, they may sour on near-shoring.
At the same time, businesses need to be aware that higher-cost repatriated investment means that there are still lower-cost operations elsewhere that could well threaten future competitiveness. They, too, may lose enthusiasm for near-shoring. Best to keep an open mind and remain flexible.
Here’s the deal
Past promises to re-shore, near-shore or re-localize supply chains weren’t honoured for a reason. Businesses simply weren’t convinced that the long-run costs of disruption justified a substantial re-working of their global production networks. Political pressure and security concerns have convinced many that it’s time to make good on the promises.
Whether or not the changes stick remains to be seen. Where national security is concerned, near-shoring is here to stay. For the rest, time alone will tell. As near-shoring is essentially a policy in flux, it is critical to keep an eye on the progression of the issue in the coming months.
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