Dear Members and Friends:

Hope you are staying well and had an enjoyable Thanksgiving. Let’s get started on the recent news.

Economic Trends

We have several reports on global economic trends. Fitch’s report from October, “Global Monthly Presentation,” shows their consensus forecast to be lower than that of the IMF, with slowing for almost all areas primarily due to monetary tightening to battle inflation. Sentiments and expectations are lower and continued tightening seems to be the trend. The Eurozone will be especially hard hit with energy price increases. Although the US had a better third quarter, Fitch predicts a mild recession in 2023.

In a second report by Fitch, “Latin America Macroeconomic Update: Challenging Growth Outlook, Despite Q222’s Overperformance,” some countries such as Venezuela, Colombia, Nicaragua, and Brazil have done very well in real GDP growth since March due to private demand and elevated commodity prices that benefited exporters. However, newly restricted interest rates will cause growth to slow. In looking at particular countries, Mexico will see only 2.0% growth for 2022 and only 1.0% for 2023 as the US has a mild recession, limiting Mexico’s exports to the US and remittances from the US.

The EIU’s recent report “Global Economic Outlook 2022 - Explaining the Main Drags on Global Growth,” indicates that the war in Ukraine, monetary tightening, and an economic slowdown in China are weighing on the global outlook. The Eurozone will have an economic recession next year and the US economy will experience a mild recession in the next 12 months, with real GDP growth slipping from 1.5% in 2022 to just 0.5% in 2023.

Supply Chain and Nearshoring

The global supply chain is both the cause of and an effect on economic and political conditions in the world. A few recent reports are relevant here.

Brookings has released a report, “Six Ways to Improve Global Supply Chains,” that can provide some guidance for the future. The author suggests:

Boosting domestic production through on-shoring and near-shoring
Easing transportation jams
Prioritizing public health
Managing labor shortages
Fighting anticompetitive practices; and
Mitigating geopolitical tensions

The author ends by saying that

Resolution is going to require progress on many different fronts. There will need to be improvements on a variety of factors to make a difference in production, logistics, and distribution. Progress will not be easy or quick but can be made if there is a clear and comprehensive strategy to deal with the multiple challenges and complex interconnections.

CED, The Committee for Economic Development of The Conference Board, released a very detailed report, “A Road Map to Achieving Free but Secure Trade with Resilient Supply Chains,” which goes through the recent history of trade and supply chain issues beginning with the Great Recession of 2008. CED lists four factors that affected the supply chain crisis and changes to trading patterns we have today: changes in the US-China trade and strategic relationship; the pandemic; Russia’s invasion of Ukraine; and the transition to stakeholder capitalism. The solutions addressing supply chain issues include reshoring, nearshoring, and friend shoring. On trade, the authors indicate that we have lost presence in the new relationships in the Pacific – CPTPP and RCEP – and need to renew leadership in trade through forthright engagement and a serious plan to respond with determination and imagination to the significant developments that have occurred. Much good material in the report’s thirteen main sections.

While the CED report covered several thoughts on “shoring,” according to an analysis by the Inter-American Development Bank (IDB), nearshoring could add $78B in exports of goods and services to Latin American countries – with Brazil and Mexico getting to highest benefit. The report, “Nearshoring Can Add Annual $78 bln in Exports from Latin America and the Caribbean,” gives details for each country based on estimates of trade ministers from those countries, with Mexico’s total amounting to $29.6B. At the same time the report was issued in July, IDB announced support for plans by the government of Mexico to promote nearshoring, or the relocation of companies closer to end markets, to help foster sustainable development, especially in the country's south-southeastern states (“IDB Joins Forces with Mexico to Promote Nearshoring”). In the next three years, IDB Invest will provide an estimated $1.75 billion to $2.25 billion in short- and long-term financing and mobilized resources for new industrial parks, investment in anchor companies (including relocation expenses), and development of innovative mechanisms to finance small and midsize companies (SMEs) working in global supply chains.

Brexit/EU/UK Update

Although already almost three years old, the UK’s departure from the EU is in the news again. Former Prime Minister Liz Truss’s quick departure from office brought up discussion of what Brexit has done to the UK economy in the interim. The Economic & Social Research Institute (ESRI) has provided some information on the subject, “How Has Brexit Changed EU-UK Trade Flows?” The report from October is very detailed and shows not only UK but also EU trade with each other and the world. An earlier analysis, “Unravelling Deep Integration: UK Trade in the Wake of Brexit,” was done in March by Freeman, Manova, Prayer and Sampson (FMPS).

The reports use slightly different data sources and arrive at different conclusions when looking at percentage changes. ESRI’s initial estimates using EU data and the EU’s trade with the rest of the world as a control group show a big decline in UK to EU trade, and a smaller impact on EU to UK trade. FMPS found a positive impact of Brexit on UK to EU trade and a strongly negative effect on EU to UK trade. Although the reports only cover trade patterns through 2021 and result in different conclusions, the fact remains that Brexit has resulted in a decline in total trade flows between the UK and the EU. This, combined with the causes of PM Truss’s departure, has resulted in those opposing Brexit in the UK to question whether the their decision to leave the EU and gain “independence” was a wise move. Recent polls show the public doesn’t think so.

One last point on former PM Truss. Before departing, she was asked about the possibility of a trade agreement between the UK and the US. She said that no deal was on the horizon due to the US.’s lack of interest at this time.

Remember that all of our past updates and webinars can be found on our website at www.usmcocma.org/resources.

Have a great and safe holiday season. See you after New Year!