Checking In on Growth in Mexico and Canada

Last week we learned US gross domestic product (GDP, a government-produced measure of economic output) grew 4.9% annualised in Q3 on the back of strong consumer spending and inventory restocking.^[i] But what of the rest of North America? That question came into focus Tuesday, with Mexico and Canada’s seemingly divergent results exemplifying what we find to be the global economy’s current theme: pockets of strength and weakness. In our view, it is all old news for markets, but it shows economic fundamentals ended Q3 on a decent note.

Starting with the strong pocket, Mexican GDP rose 0.9% q/q, beating expectations for 0.8%.^[ii] On a sectoral basis, agricultural output jumped 3.2% q/q, manufacturing rose 1.4% and services grew 0.6%.^[iii] We have seen a lot of talk about Mexico benefitting from near-shoring (when companies shift production from overseas to nearby countries) manufacturing in the wake of COVID lockdowns and global shipping disruptions, and manufacturing’s nice jump appears to be evidence of that. But Mexico’s economy is far more than US factory space, and we think services’ growth indicates domestic demand is doing quite well. Mexico’s national statistics agency doesn’t include GDP contributions in its initial estimate, but the World Bank estimates Mexico’s services sector is nearly 60% of GDP, whilst manufacturing is just under 20%.^[iv] So it seems to us domestic demand did a lot of the heavy lifting last quarter. The strong economic relationship with the US probably still plays a role here, but we don’t think this is a simple case of a big country pulling a smaller neighbour along. Rather, we see it as a sign of regional strength that should benefit companies doing business throughout the continent.

Of course, this is all before Hurricane Otis tragically struck Acapulco this month, causing widespread damage.^[v] Already, commentators we follow are discussing how spending on rebuilding could add to GDP in the quarters ahead, with which we disagree. Money spent on rebuilding levelled villages, replacing destroyed infrastructure and repairing property is money that would have likely been spent on and invested in other things if the hurricane hadn’t struck. Rebuilding isn’t economic stimulus, in our view. In most cases, it likely redirects money that might have gone to other and potentially more productive and profitable use. At best we think it is zero sum. Regardless, the estimated cost, $15 billion (£12.3 billion), is a tiny sliver of Mexico’s nearly $1.7 trillion (£1.4 trillion) in annual GDP.^[vi]

As for Canada, America’s neighbour to the north isn’t faring quite as well. The full Q3 GDP estimate isn’t out yet, but August’s monthly GDP report included rough estimates for September and Q3. Statistics Canada described each as “essentially unchanged.”^[vii] Whether this is a slightly positive “essentially unchanged,” which was the case with August’s print, or a slightly negative “essentially unchanged” as in July, it is a big miss compared to the Bank of Canada’s recent forecast for a 0.8% annualised Q3 rise.^[viii] Yet it also isn’t quite the so-called technical recession we saw some number crunchers pencilling in on the presumption that Q3 would be a slightly negative number.^[ix] Following Q2’s -0.2% annualised decline, a Q3 contraction would meet one popular recession definition of two consecutive declines.^[x] But in our view, that determination is way premature at the moment, and we think you would have to do some weird maths to reach such a conclusion. Regardless, if the contraction rounds to nothingness, recession chatter seems pretty overwrought to us.

Either way, we think a look at the underlying data shows Canada isn’t uniformly weak. Manufacturing fell -0.2% m/m, but services—the lion’s share of Canadian output—grew 0.1%.^[xi] Mining, quarrying and oil and gas extraction jumped 1.0% m/m as higher prices encouraged more energy production—a boon to global energy supply and Western Canada’s economy (and in our view, a good sign of the ongoing recovery from springtime wildfires).^[xii] Travel also rebounded, and financial services continued growing.^[xiii] Retail trade fell, but with services growing overall, we think it is a stretch to say high rates are clobbering consumers, especially with vehicle sales the main source of the decline.^[xiv]

At any rate, we think the data show Canada has pockets of strength and weakness just as the North American economy overall has pockets of strength and weakness—just like the full global economy. See the eurozone’s preliminary Q3 report—which showed a -0.1% q/q contraction in Germany, 0.1% growth in France, 0.3% growth in Spain and a flat Italy—for another example.^[xv] Some countries are probably in recession, with Germany one notable example, in our view.^[xvi] Others aren’t, and they outnumber and outweigh the weaker areas. Is this a world firing on all cylinders? Probably not. But it does seem to be a world that is growing in the face of pessimism about high rates and energy costs, which we think is likely good enough for stocks once this sentiment-fuelled pullback runs its course and markets resume their day job of weighing fundamentals.