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A Quick Look Around the World
As I settle in Europe for most of this summer, I can’t help but be reminded that, all things considered, the US is still in better shape than most of the world. Our economy has been a machine for prosperity for 250+ years now and still going. Despite all our flaws and mistakes, the US economy is still pretty amazing.
But as I look around Europe, I see average unemployment still at 6.8%. Energy prices are through the roof as Europe struggles with Russian energy and massive green energy challenges. And the Europeans are dealing with the largest migration challenge since WWII, not to mention the largest military challenge since then as well. It’s tough over here.
In Asia, the world is getting rockier too. China has slowed significantly – possibly to the slowest it’s grown in decades - and Japan still struggles with low growth and a mountain of debt that’s now 266% of GDP!
We may have our problems in the US, but relatively speaking, we’re doing okay. The key I believe is that our economy is still fundamentally based on markets and competition and is still quite flexible relative to most other economies in the world. The reason that matters is because all market participants (investors, business people, etc.) understand intuitively and correctly that problems come and go, but as long as the main economic engine is fundamentally okay, we’ll eventually come out the other side of the current storm fine at a very fundamental level. And that partly explains why the rest of the world still moves its money to the US when things look bad globally.
The Wall Street Journal reported this week that investors moved the most money in 29 years into the US Treasury markets. Apparently in only four weeks, some $20 billion flowed into funds focused on US Treasuries!
That’s a little bit concerning because it makes your wonder just how bad is it everywhere else!
Well, the sky hasn’t fallen yet, but investment flows are always forward looking and most signs indicate very dark horizons.
We can’t cover every country in the world, but I thought it would make sense to look at what’s happening in the top countries the US trades with. I start with the countries to which we export the most.
Top Export Destinations
Our top export destinations are Canada (#1) and Mexico (#2). We sometimes forget that these are our biggest trading partners but it makes sense when you recall our North America (free) trade zone or whatever it’s called now. After that comes China (#3) which is no surprise.
Most of us expect China to be #1 actually, but it’s not, it’s #3. And, actually, if the European Union were a single country, then the EU would be #1, pushing China to 4th place for US export destinations.
Next on the list are Japan (#4) and Germany (#5). You can check the latest ranking sometime if you like at the US Census Site.
How are Our Export Destinations Doing?
CHINA is in the news the most. And, honestly, China warrants separate columns entirely. It’s complicated and I am not an expert on China per se. I’ll have a few comments here, but plan do something longer in the future just on China or on China and restructuring global supply chains.
In any case, China is having trouble these days. Its economy has slowed significantly and it’s too early to tell if that’s just Covid policy and related challenges or something more. My suspicion is that it’s something more. China is also struggling politically internally and geo-politically since the US seems to have woken up to the problems in China in recent years. In short, economically this means slower growth in China and weaker demand exports from the rest of the world (i.e., weaker demand in China for imports).
CANADA unfortunately also seems to be slowing along with the US. GDP growth is expected to be around 2.9% for the year which isn’t bad, but I don’t think the forecast fully accounts for the effects of interest rate hikes as Canada tries to fight it’s 7% inflation rate. The Central Bank of Canada raised rates again this week and plans to continue doing so. I think that GDP forecast of 2.9% for the year is a bit high.
MEXICO is only forecast to grow at 1% this year and also struggles with about 8% inflation. The US economy probably kept Mexico’s growth positive because US demand for imports from Mexico has been so strong lately.
Mexico is having some issues. They’ve had some political challenges lately but their economy might benefit in the coming years if supply chains continue to move out of China to other countries. Mexico would pick up some of the higher value lines and for those seeking to serve US manufacturing specifically. We’ll see.
JAPAN’s annual growth rate is around 0 or -1% for the year, depending on the measure you look at. Japan’s unemployment and inflation are low, however. But as a source of demand for US exports, it remains constant to potentially weaker going forward. 0 or -1% GDP growth doesn’t make for a great market opportunity.
GERMANY seems to be – or seems to have been – in the strongest position with GDP growth around 3.8% for the year but 8% inflation. The question, of course, is how the war in the Ukraine will affect the German economy. Energy prices in Europe are rising very, very rapidly and they haven’t even started to try really wean off Russian supplies yet.
All of that tells me that US exports will likely be soft and softening in the coming months. Combine that with an unusually strong US dollar as investors continue to flood US markets with money - which drives up global demand for our currency and hence strengthens the dollar relative to other currencies in world markets – and I do think that will make it challenging for US exporters generally this year. Weaker exports means weaker GDP and fits into the overall slowdown story for the US and world economy.
The Import Side and Vietnam’s Growing Importance
The top countries the US imports from are mostly the same as those we export to but with two differences. First, China is the number one country we import from. That’s no surprise. It hasn’t changed in decades. It didn’t change under Trump with the tariffs and it hasn’t changed today.
The most relevant issue with China – from an import perspective – is that due to Covid lockdowns and shipping problems, along with growing concerns over political stability, global businesses are looking to move their supply chains out of China to other low-cost countries.
The benefits of this for businesses are really two. First, there’s a benefit in moving to a more politically reliable country and, second, there’s a general benefit in diversifying the supply chain. This is a process that some are calling “de-Globalization” and it will have some big effects, most notably, likely limiting the low-cost benefit of importing since the new supply chain structure will not be solely based on low-cost but on reliability and some redundancy too.
One thing we can discern from this, however, is that everyone seems to feel that the sovereign risk of China is rising. There are many reasons. Some of this is part of the political tides that have been changing for years and some more recently from Covid. But the tide is turning and the risks are high enough that companies are actually restructuring their global networks. That in itself is a signal of how they view things.
With that in mind, I will begin watching VIETNAM more closely. It’s actually our 6th most important country in terms of imports. The others, as mentioned above are, Mexico (#2), Canada (#3), Japan (#4) and Germany (#5).
But I think Vietnam is the country to watch. The reason is that, as I understand it, many companies are moving their operations from China to Vietnam and many supply chains are being restructured to run through there as well.
I don’t know too much about Vietnam these days, to be honest. They are doing well economically. Their GDP is growing at about 5% a year, unemployment is 2-3% and so is inflation. The low unemployment number could be a challenge as more multinational companies enter and compete for labor in an already tight market. But, it’ll be great for the Vietnamese people whose wages get bid up in the process. If they can sustain that for a few years, they can build an economy around it and benefit from it long term. That would be wonderful to see.
It is still a socialist country though and borders China, so time will tell as to how reliable it is as a China alternative. But I think Vietnam is worth keeping an eye on.
My conclusions are a little less focused and precise today. I’ve been watching global news and trends and thinking about the most useful areas to focus on. It’s a messy world today and so many things are in transition that is makes one’s head swim.
The immediate conclusion here is simply that global economic growth is fragile today. That suggests weaker exports for the US and an ever stronger dollar which also encourages US imports. Those factors all push for more negative GDP numbers, but more importantly they signal slowing demand for US goods and hence further headwind against the US economy.
 WSJ article “Main Street Investors Break Records in Rush for U.S. Government Bonds” https://www.wsj.com/articles/main-street-investors-break-records-in-rush-for-u-s-government-bonds-11654035356?st=bt6bdg379dqdf24&reflink=desktopwebshare_permalink
 US Census Trade Stats: https://www.census.gov/foreign-trade/statistics/highlights/toppartners.html . I always found it odd that the US Census is where you get trade stats and rankings. But anyway.