In this episode, a pick-up of a live webinar hosted by RCC earlier in the fall, I have the pleasure of a comprehensive, engaging, and wide-ranging conversation with Ira Kalish, Chief Global Economist, Deloitte Touche Tohmatsu. This is Ira's second time on the podcast. With the benefit of almost one hour of his time, we deep dive into the global economy region by region, including the current state and their prospects for growth or trouble. Next, we zero in on Canada, helping retailers understand the global forces and local impacts of our interconnected world.
Welcome to The Voice of Retail. I'm your host Michael LeBlanc. This podcast is brought to you in conjunction with Retail Council of Canada.
In this episode, a pick-up of a live webinar hosted by RCC earlier in the fall, I have the pleasure of a comprehensive, engaging, and wide-ranging conversation with Ira Kalish, Chief Global Economist, Deloitte Touche Tohmatsu.
This is Ira's second time on the podcast. With the benefit of almost one hour of his time, we deep dive into the global economy region by region, including the current state and their prospects for growth or trouble. Next, we zero in on Canada, helping retailers understand the global forces and local impacts of our interconnected world.
About Ira
Dr. Kalish is the Chief Global Economist of Deloitte Touche Tohmatsu Ltd. He is a specialist in global economic issues as well as the effects of economic, demographic, and social trends on the global business environment. He advises Deloitte clients as well as Deloitte’s leadership on economic issues and their impact on business strategy. In addition, he has given numerous presentations to corporations and trade organizations on topics related to the global economy. He is widely traveled and has given presentations in 47 countries on six continents. He has been quoted by the Wall Street Journal, The Economist, and The Financial Times. Dr. Kalish holds a bachelor’s degree in economics from Vassar College and a PhD in international economics from Johns Hopkins University.
About Michael
Michael is the Founder & President of M.E. LeBlanc & Company Inc and a Senior Advisor to Retail Council of Canada as part of his advisory and consulting practice. He brings 25+ years of brand/retail/marketing & eCommerce leadership experience and has been on the front lines of retail industry change for his entire career. He has delivered keynotes, hosted fire-side discussions with C-level executives and participated on thought leadership panels worldwide. Michael was recently added to ReThink Retail’s prestigious Top 100 Global Retail Influencers for a second year in 2022.
Michael is also the producer and host of a network of leading podcasts, including Canada’s top retail industry podcast, The Voice of Retail, plus the Remarkable Retail with author Steve Dennis, Global E-Commerce Tech Talks and The Food Professor with Dr. Sylvain Charlebois. Most recently, Michael launched Conversations with CommerceNext, a podcast focussed on retail eCommerce, digital marketing and retail careers - all available on Apple, Spotify, Amazon Music and all major podcast platforms. Michael is also the producer and host of the “Last Request Barbeque” channel on YouTube where he cooks meals to die for and influencer riches.
Michael LeBlanc 00:05
Welcome to The Voice of Retail. I'm your host Michael LeBlanc. This podcast is brought to you in conjunction with the Retail Council of Canada.
Michael LeBlanc 00:09
In this episode I picked up a live webinar hosted by Retail Council of Canada earlier in the fall. I have the pleasure of a comprehensive, engaging and wide-ranging conversation of Ira Kalish, Chief Global Economist for Deloitte. This is Ira's second time on the podcast. With the benefit of almost one hour of his time, we deep dive into the global economy region by region, including the current state and their prospects for growth or trouble. Next, we zero in on Canada helping retailers understand the global forces and local impacts of our interconnected world.
Michael LeBlanc 00:29
Ira Kalish is Chief Global Economist of Deloitte Touche Tohmatsu Ltd. He is a specialist in global economic issues as well as the effects of economic, demographic, and social trends on government, global business environments. Ira and I will chat about direct and indirect impacts of inflation, war, natural disasters, demystifying the true impact for Canadian retailers about the global economy. Ira, welcome.
Ira Kalish 01:09
Thank you. Happy to be here today.
Michael LeBlanc 01:11
Well, uh, where are we finding you today? Whereabouts, are you?
Ira Kalish 01:15
I'm in my kitchen in my home in Los Angeles, California.
Michael LeBlanc 01:18
Fantastic. We were just chatting before. Before we started, you're, you're back traveling. You were in Rome when we last spoke? And do you have a full slate of travel for the rest of the year planned? Is it, I imagine it's pretty busy, a lot of people want to see you in person, I'd imagine?
Ira Kalish 01:34
Yeah. Actually, I find that the more there's uncertainty and crisis in the world, the greater is the demand for my time. So, it's kind of a form of job security. You'd almost think that I created all the troubles in the world just to keep my job. But yeah, there's a lot of travel taking place now after almost none for about two and a half years. So, I'm actually pleased about that.
Michael LeBlanc 02:00
Well, tell us a little bit about yourself, you know, I've read your title and your background, but how did you get into your role today? What's your, you know, were you always interested in economics? And how did you find yourself where you are today?
Ira Kalish 02:12
Well, I've always been interested in economics. When I was younger, I thought I would study politics. And my father said to me, you know, I'm not a rich man, you're going to have to make some money on your own. And he suggested that economics might be a way to make money. But where, there's a link to politics, and he was right about that. And so, I've been doing economics, my whole professional life. And I enjoy it. It's really interesting.
Michael LeBlanc 02:39
Well, as they say, may you live in interesting times, we are,
Ira Kalish 02:44
Right.
Michael LeBlanc 02:45
In some pretty interesting times, you know, coming out of, coming out of the COVID era, whatever we were, what are we in now a quasi-post-COVID? I think your, your president announced the COVID pandemic was over that may,
Ira Kalish 02:54
Yeah.
Michael LeBlanc 02:55
That may or may not be a little premature, looking at the numbers?
Ira Kalish 02:59
Well, it may never be over. I mean, we will, COVID will always be with us, I'm told but we seem to be able to live with it now and in that sense, the pandemic is over. The one exception being China where they can't seem to live with it.
Michael LeBlanc 03:13
Yeah, I want to get back to that. That's kind of one of my first questions, because you know, before I do that, let's talk about Deloitte. So, no one, no one listening doesn't, hasn't heard of Deloitte. But tell us something about Deloitte that might surprise us. What, what, what surprises people about your organization?
Ira Kalish 03:28
Well, Deloitte is the world's largest professional services firm. When I joined almost 20 years ago, it was mostly an auditing firm with a little bit of consulting on the side. Today, it's mostly a consulting firm with a little bit, not a little bit, quite a lot, but a smaller amount of auditing. On the side, we do all sorts of things, for all sorts of businesses and government organizations around the world. We're in about 150 countries, and we employ over 400,000 people. In the most recent fiscal year, we had revenue of about $60 billion. So, we're big.
Michael LeBlanc 04:06
60 billion, see, I didn't know that. I didn't, I didn't. I wasn't paying. I know that number of people and I know lots of folks that work for Deloitte. But that's, that's immense, right? That's, that's a huge organization.
Ira Kalish 04:17
And we do a lot of interesting and good things. I mean, in addition to auditing and tax advice and consulting, we advise both businesses and governments about things they can do to make the world a better place, actually. That's, that's kind of a you know, a standard line, but it's actually true. And I think the most interesting thing I ever heard of Deloitte doing was when Sudan split from South Sudan, creating a new country. And the United States Agency for International Development, was tasked with helping South Sudan create a country from scratch. And they hired Deloitte to help in this process, and we sent a whole bunch of young consultants out to the desert in South Sudan to live in tents and create a government from scratch.
Michael LeBlanc 05:00
Wow.
Ira Kalish 05:01
And I thought, That's really interesting. If I were younger, I would have loved to do something like that. But so that's just one unusual example of the kinds of things we do.
Michael LeBlanc 05:22
Well, nation building, right. I mean, and, and I wanted,
Ira Kalish 05:25
That's right.
Michael LeBlanc 05:27
I wanted to ask you, I wanted to ask you that, because you know, our scale of the discussion today, we're going to start very global. So, I think it helps the viewers or the listeners understand the breadth of resources you have either access to or just, you know, you could get questions from South Sudan, to Paris, to Rome to wherever.
Ira Kalish 05:38
Right.
Michael LeBlanc 05:39
So, in our discussion today, I wanted to start very global, and then we're going to work our way down to the Canadian context. And of course, retailers trade around the world. So, they're very sensitive or very attuned to global issues. And I wanted to go kind of not nation by nation, but area by area, a little bit of nation by nation and kind of a rapid-fire round, because we could spend an hour just talking about China.
Ira Kalish 05:59
Of course, yeah.
Michael LeBlanc 06:01
And the prospects of China, but let's go through from, let's start in China. And I want to talk about the economic prospects there, because there's a couple of things happening, right. The, of course, the, the, the COVID-Zero policy is created, much sudden disruption. That's a geopolitical policy. And then the broader politics or sorry, the broader economic in-, initiatives, things like the Ring Road, which is their broader big investment in countries around the world. How is their economy looking and shaping up? And what's your observations about China? Let's start there.
Ira Kalish 06:45
Their economy is not looking especially good right now. It's sort of a perfect storm of negative headwinds that they're facing. One headwind that you alluded to is this COVID policy, a zero-tolerance policy, whereby if one person in a factory is infected, they shut the factory down. If 1000 people in a big city are infected, they shut the city down. And it's interesting that although there's been a rise in infections in China, the level is really very low. Just to put it in perspective, the rate of infection here in the US is about 300 times higher than in China. And we go about our business right now. We don't even wear masks anymore.
Michael LeBlanc 07:06
Yeah.
Ira Kalish 07:07
In China, that very low rate has led them to impose severe partial or full lockdowns on 70 major cities a few months ago, and although they lifted some of those lockdowns, there are still substantial restrictions that suppress economic activity and actually disrupt global supply chains. Then China also has problems in its property market, which are likely to persist. They have electricity shortages, because of climate change, which led, because of a heatwave in the summer, water levels declined, which made it difficult to produce hydroelectric and nuclear power. So, factories had to shut down because of that. And then they have a government that has become perhaps hostile to the private sector, with more support for the state sector, even though over the past 30 years, just a proportionate share of their growth came from the private sector. So, all of these things are conspiring to make China's economy grow slowly, which it will do this year and next. And that has an impact on the global economy, it leads to weaker growth elsewhere, it leads to lower commodity prices. And we're still seeing disruption of global supply chains. And anecdotally, we're seeing many global companies start to move some of their supply chain processes out of China to other countries, in order to avert some of the political risk involved with China.
Michael LeBlanc 08:57
It's interesting because we often think of China in the contemporary context as a manufacturing powerhouse, but they're also a consumer powerhouse. They have a billion people that can consume goods and many,
Ira Kalish 09:13
Correct.
Michael LeBlanc 09:14
Retailers that we would know Canada, Canada Goose or Roots have gone there. Starbucks just announced a major expansion into China. There's a lot of consumers there. So, I guess that, that economic, those economic headwinds prevail. I guess the last thing I want your opinion on China is, I mean, typically, Chinese governments take a very long view to these things, which, you know, is, is the long view out in the short term, there's little pain, any sense of the long view of they're just going to muster through it and get through it. It's, it's not always knowable, but what do you, what are your thoughts on that?
Ira Kalish 09:41
I mean, the thing I think there's debate going on within China, the current regime under Xi Jinping has made some significant changes. One, of course, is the COVID policy, which it's reluctant to change and I think serves them well in terms of restricting in and out travel. And again, there's a greater emphasis on the state sector and on the government and on the Communist Party. And I think there is some resistance to that on the part of more market-oriented leaders within China, and how that will unfold in the next few years, I'm not sure. But at the very least, it's having a disruptive effect on global business. Now global, as I indicated, many global companies exposed to China are starting to move supply chain processes out of China, but they're also wary of offending the Chinese government because they also want to sell into China.
Michael LeBlanc 10:27
Right.
Ira Kalish 10:28
So, there's a balancing act there. You're right, China's a huge market, 1.4 billion people, the second largest economy in the world.
Michael LeBlanc 10:47
50% eCommerce, 50, five, zero, they're expecting I was talking to,
Ira Kalish 10:49
Yeah.
Michael LeBlanc 10:50
I interviewed in Las Vegas someone from Alibaba Tmall. And we were talking about that they're almost 50% of all retail sales are online now digital, so it's quite -
Ira Kalish 10:59
Right.
Michael LeBlanc 11:00
It's an interesting thing that we look to China for trends, like live streaming shopping, but they don't always translate directly. So, I think that'd be the last thing that you know, we continue to learn. Just because it works there doesn't mean it's going to work here.
Ira Kalish 11:16
So, it increased dramatically there during the pandemic when people had to stay home. And it made sense to shop online. And we saw the same thing.
Michael LeBlanc 11:25
Sure.
Ira Kalish 11:26
In North America and in Europe, but not to the same degree.
Michael LeBlanc 11:31
Yeah. Let's move on from China and talk about, I want to talk about Vietnam, looking at other Asian nations. Now they seem to be, they come up in my conversations with retailers quite often as a source,
Ira Kalish 11:37
Right.
Michael LeBlanc 11:38
Manufacturing, they seem to be maybe a net beneficiary or a nation that manufactures even private label retailers are looking to as an alternative to China or just a standalone nation on itself. They seem to be on the rise. Would you concur?
Ira Kalish 11:56
Oh, absolutely. China's, I mean, Vietnam is probably the fastest growing economy in Southeast Asia right now. And there's been a lot of investment in low value, added manufacturing. And, and, and this was already going on pre-pandemic, because as China grew, wages rose, and in terms of making things like apparel, textiles, shoes, toys, electronics, (crossover talk).
Michael LeBlanc 12:11
Prices are going, prices started going up, right?
Ira Kalish 12:14
Yeah, that's very labor intensive. With wages going up in China, it didn't make sense to do those things there anymore. So, a lot of that capacity left China and a lot of it went to Vietnam, because the Vietnamese government was very welcoming. Initially, there were some, some hiccups because they didn't have the infrastructure. They didn't have a trained workforce of managers. But that's changing. And now Vietnam is, with its 100 million people, roughly, it's a very attractive place to do these types of things. So, I expect that to continue.
Michael LeBlanc 12:56
Well, let's stay with Southeast Asia. Let's talk about India. They're always the economic powerhouse next.
Ira Kalish 12:58
Yeah.
Michael LeBlanc 12:59
You know, they, they again, the population is, it's hard to, and the education, the population, they're the largest, I think they're now the largest English-speaking democratic nation in the world. But they've always been, seemed to be held back by infrastructure and a bunch of other things. What's your, what's your forecast? What are you thinking about India?
Ira Kalish 13:20
Well, they are growing rapidly, they probably could grow faster, if they played their cards right, which they haven't done. There are many obstacles as you indicated, infrastructure, there are policy obstacles, regulations, especially regarding the labor market as well as Intra-Indian Trade. There is a reluctance to allow a sort of rationalization of some economic processes. So, for example, in India, a lot of retailing is mom and pop. And obviously, it would make more sense from an efficiency point of view, and even from the prices paid by consumers, it would make more sense to consolidate and allow big retailers to grow at the expense of the small mom and pops. But that would entail a lot of those mom and pops, losing their businesses, losing their jobs. So, there would be a difficult transition which the government is somewhat reluctant to allow. So, that's just one example of the types of regulations that inhibit greater efficiency in the Indian economy.
Ira Kalish 14:19
Plus, India is also a fairly protectionist economy. There's the level of trade as a shared GDP is much lower than China and other major Asian economies. Hopefully, that will change because there is a potential to accelerate growth in India. It is a vast economy, also 1.4 billion people, many of whom could be considered middle class in the sense that they have discretionary purchasing power and although you alluded to a very high level of education for some people, there's still an awful lot of people that are illiterate, under-educated and malnourished. So, there's a real, real dividing line there in India that will also need to be addressed. But it's becoming a more attractive place for global companies to invest, especially for those that may be worried about some of the uncertainty regarding China and its relationship with the West.
Michael LeBlanc 15:31
Let's turn our minds to Japan. I mean, when I was going to school, Japan was the economic powerhouse, but they, there, they've had 20 years of stagnant growth. Do you see that changing? Do you see a turnaround in the, in the Japanese economy and, and again, both, both manufacturing from many commodities, but also consumption?
Ira Kalish 15:51
Well, in part that slow economic growth reflects a declining population. On a per capita basis, they actually haven't done too badly, but they have a very low birth rate, a very aging population, and only recently have begun to allow a significant amount of immigration. So, on a per capita basis, the standard of living in Japan is quite good. Income distribution is reasonably good. So, people have a pretty good life there. So, even though the overall economy hasn't grown rapidly, that doesn't seem to be that big of a problem. I think going forward, I mean, the government continues to try to do things to accelerate growth.
Ira Kalish 16:26
One of the things they have done is to allow a bit more immigration, especially of skilled workers. They have taken steps to encourage more female participation in the labor force, which has been successful. In fact, the female rate of participation in Japan is higher than the US right now. And they've also taken steps to have Japanese companies take steps to rationalize and reduce costs. So, a lot of what were high costs, manufacturing processes in Japan have been moved offshore to places like China and Southeast Asia. And that has enabled those companies to become somewhat more competitive.
Michael LeBlanc 17:17
Well, let's turn our minds to Europe. And I guess we should include England, in Europe, even though they're, they've Brexit-ed out. I mean, in England,
Ira Kalish 17:30
Right.
Michael LeBlanc 17:31
In the headlines, they're getting pounded by a strong US dollar. They're really. They seem to be very challenged. But you know, when we think of Europe, now we think of, of Germany under stress from, you know, the high cost of energy. I think that's happening across Europe. So, what's your prognosis for the European economy?
Ira Kalish 17:44
Well, beginning with the UK, they're in trouble. They have very high inflation, the Bank of England is tightening monetary policy, energy costs have increased dramatically, as they have across Europe, in, in large part because of the fact that Russia has withheld gas from Western Europe. And so, the new British government under Prime Minister Truss, has proposed and will implement a plan of subsidies for households and businesses to offset the high cost of energy, that should initially help to stifle inflation. But it is a fiscal stimulus of about $150 billion, that in the longer term could be inflationary, and will likely lead the Bank of England to tighten monetary policy more than they had previously planned.
Ira Kalish 18:38
And then, on top of that, the British government just last week announced that it will cut taxes, boosting the budget deficit at a time when inflation is high, and the job market is tight. And markets reacted very badly to that as they should, because that really didn't make sense. And so, we saw bond yields rise, equity prices fall, and the value of the pound dropped sharply. Now, the US Dollar was rising already, for a variety of reasons, but the pound dropped not only against the dollar, but against the euro. And right now. I didn't look this morning; I think it was the latest. The pound was about $1.07 US dollars, a dollar and seven cents, which is great for me because I'm going to London next week, (crossover talk). So, I can do some shopping. It will be really cheap, (crossover talk).
Michael LeBlanc 19:35
I mean, I remember the days going to, going to England and you just you know from a Canadian dollar you just double it like everything you'd see you would just double it,
Ira Kalish 19:47
That's right.
Michael LeBlanc 19:49
And,
Ira Kalish 19:50
That's right, yeah.
Michael LeBlanc 19:52
It's a, it's a phenom-, it's a phenomenal difference. So, now as we think about, when I think of mainland Europe, I think, I think primarily of Germany. But what are the, what are the prospects for recession in Europe with all the forces that are, that are lined up thanks to the war?
Ira Kalish 19:58
Very high. I, I, I think it's very likely that Europe, if it's not already in recession, will go into recession before the end of this year. The Russians have cut off gas through the Nord Stream pipeline and have reduced gas flows through other sources. And although European countries, especially Germany, are taking steps to get gas from elsewhere, like Norway, Algeria, and liquid natural gas from the US, they're still facing a severe shortage and severely higher energy prices. It's likely in the cold winter months that there will have to be some rationing of gas, which will lead to shutdowns of factories and other facilities. That will mean a decline in economic output. And that means a recession. So, it's almost a certainty to me, unless Putin changes his mind, which doesn't seem likely that there will be a recession in Western Europe. And, and then add to that the fact that there's already very high inflation, mainly driven by energy prices, and the European Central Bank, which runs monetary policy for the 19 countries that use the euro as their currency is tightening monetary policy, raising interest rates, and that too, will add to the risk of recession. So, things aren't looking great for Europe right now.
Ira Kalish 21:54
And, and you know, the Russians are doing this, because they want to undermine European resolve with respect to sanctions. At the very least, they're hoping that this might deter the Europeans from implementing new sanctions, especially on the energy sector. And I think they also want to undermine European unity, because a lot of the gas that flows from Russia to Germany, much of that goes beyond Germany, say, to France or other countries and Germany is obligated to supply that gas. But, you know, Germany is hoping, for example, that France will conserve, as the Germans have done, and the Russians are hoping, well, maybe if they don't, there'll be a conflict between the two. And meanwhile, there are political events in Europe that could undermine European Union unity. We just (crossover talk) saw the election.
Michael LeBlanc 22:22
Yeah, we have a new government in Italy, right. A far-right, (crossover talk).
Ira Kalish 22:25
A far-right government in Italy, there's already a far-right government in Hungary. There are fairly strong far-right, political parties in France and Sweden, in, in, and in a couple of other countries. So, I think Putin is hoping that I mean, from his point of view, this is, he's playing the long game, he's hoping he can undermine European unity and undermine the unity that's evident between Europe and North America.
Michael LeBlanc 22:59
Well, let's, let's talk about Russia. It's a good segue, let's talk about Russia. I mean, they've gone from a pariah behind the Iron Curtain to a major economic exporter of, of goods, everything from fertilizer to, to commodities, and now they're back to being a pariah again.
Ira Kalish 23:17
They are isolated. Yeah.
Michael LeBlanc 23:18
I mean, how do you, what do you think of that capacity? Could both consumption and production just be extracted basically from the global economy, what, what impacts in the global economy does all that including the Ukraine suddenly missing from a productivity perspective?
Ira Kalish 23:35
Putin didn't necessarily play his cards, right. It was always his goal to weaken NATO, to weaken the European Union, his actions have done quite the opposite. It was always his goal to be a reliable supplier of energy to Western Europe. Now he's not. And of course, it was his goal to put back together the Russian Empire, not the Soviet Union, but the Russian Empire. And he's failing at that. So, he and, and he also started this war with the expectation that China would have his back, and they don't. So, I think he's really weakened Russia's position. Now, in the short term, he hasn't done too badly. I mean, the war hasn't gone well. But his revenue from oil and gas has gone up because of the rise in energy prices. But in the,
Michael LeBlanc 24:07
Right.
Ira Kalish 24:08
Longer term, now that Europe is working very hard to obtain alternative sources of oil and ga-, oil and gas, as well as accelerating investment in clean energy in the long term that screws Russia, really, because all they have is oil and gas, as well as a few other mineral commodities and some grain commodities. But for the most part, it's an oil and gas economy. It's a commodity economy, I mean, it seems to me Russia had a chance that they missed which was to utilize a highly educated population with a strong technology base, given their big military. They could have diversified their economy toward technology, toward manufacturing but they didn't. They could have done what Israel has done. Israel is a highly militarized economy. But that has enabled them to become a major center of high technology. Russia could have done that, and they didn't. And it may be too late for them to do that. So, the outlook for Russia is poor. They're going to lose some of their sources of revenue, they're losing people, they're quickly losing educated people right now. And their overall demographics were poor to begin with. So, I think the outlook is bad. And right now, Russia is in recession.
Michael LeBlanc 25:53
Let's go to the other part of the world. Let's talk about Latin America. LatAm is a market ironically, it's funny, it's a huge market. But it and, it's very close to us. But I don't think of it as often as I think of Europe, for example, but it is a massive market. And, and,
Ira Kalish 26:03
Right.
Michael LeBlanc 26:04
It's a little bit of, like your, it's a little bit of an unfair question to say, how’s it going in LatAm? But what's your, you know what's your sense of the economic conditions in, in overall in, in Latin America,
Ira Kalish 26:19
I would say there's weakness. Latin America is very dependent on the world's three big economies, the US, Western Europe, and China, all of which are currently decelerating. So, that has a negative impact on the ability of Latin American countries to export, especially their, their big commodity base. The one big manufacturer is Mexico, and it is highly dependent on the US, and to a lesser extent on Canada. And given that the US and Canada are both decelerating, that puts Mexico at some risk of recession.
Michael LeBlanc 26:55
(Crossover talk) unless they pick up some manufacturing, continental based manufacturing is, I hear, you know, let's get out of, let's get out of risk of putting things on boats. And let's at least get it onto a, somewhere we can get it onto a truck. So, there may be a bit of give and take in that, yeah?
Ira Kalish 27:10
Well, yeah, I think Mexico will benefit from global companies becoming wary of China. And there was a time when a lot of manufacturing investment took place in China at the expense of Mexico, because labor costs in China were so much lower, that's no longer the case, actually, labor costs in China are now higher than in Mexico. And Mexico has free trade sort of, with the US and Canada, not as much as before. And Mexico is in close proximity, and there's no political issue. So, from that perspective, it does make sense for some companies to shift assets from China to Mexico.
Ira Kalish 27:39
The other thing with respect to Latin America is that with the rise in the value of the US dollar that encourages capital flows from those LatAm countries to the US, that in turn puts downward pressure on their currencies, which is inflationary for them and also hurts their ability to service their dollar denominated debts. So, as a consequence, some countries in Latin America have raised, some central banks have raised their interest rates in order to stabilize their currencies. But that comes at the cost of economic activity. So, the outlook at least in the short term is not very good.
Michael LeBlanc 28:32
Well, let's now turn our minds to North America. And let's talk about kind, of the three hot take headline things, that are at least, hot take headlines in my mind. The first of all, being inflation, we're seeing inflation in a couple of key sectors, we're seeing energy inflation, and we're certainly seeing food inflation, that seems to be two of the key drivers driving up the inflation number. What, what are you thinking about inflation? I hear the sense that it's peaked in some way, shape or form, certainly oil and ga-, you know, gas prices have come down. But what's your prognosis?
Ira Kalish 29:06
I think overall, inflation has peaked in both the US and Canada, and it is still very high. And it's going to take probably a much tighter monetary policy to bring it further down. I think it's also worth noting what drove this inflation and it's not just the US and Canada, it's also Western Europe and a number of other places in the world, there was a synchronous increase in inflation to a 40 year high in multiple countries. And you know, historically, normally, inflation is driven by excessive monetary and fiscal policy. And we did have some of that and that probably played a role but not the dominant role. Instead, what we saw during the pandemic were two things: a dramatic shift in consumer spending away from services and toward goods because people were staying at home, so they didn't go to restaurants or get on airplanes. They bought stuff for the home, you know, furniture, appliances, electronics,
Michael LeBlanc 30:01
Sure, sure.
Ira Kalish 30:03
Fitness equipment that they probably didn't use. And (crossover talk).
Michael LeBlanc 30:09
You can always dry your clothes on it. That's the upside to,
Ira Kalish 30:11
Exactly. That's what treadmills, (crossover talk).
Michael LeBlanc 30:14
Peloton.
Ira Kalish 30:15
Yeah.
Michael LeBlanc 30:16
That's right. That's right.
Ira Kalish 30:19
But in any event, there was a global surge in demand for goods that businesses were hard pressed to meet. And that happened at a time when there was already stress on supply chains, because of the pandemic, because, for example, of the zero-tolerance policy in China, so this led to a dramatic increase in the prices of goods much more so than services. And then, and that meant that the overall rate of inflation rose a lot. And then you had the war in Ukraine, which led to a sharp rise in commodity prices, especially oil, gas, and food, (crossover talk).
Michael LeBlanc 30:51
And fertilizer.
Ira Kalish 30:52
Right.
Michael LeBlanc 30:53
It's very important, (crossover talk).
Ira Kalish 30:55
Although commodity prices have started to come down, consumer behavior has started to shift back towards services and away from goods, supply chains have started to get better. So, all of these factors are now helping to cause inflation to decelerate. The risk is that with inflation still very high, though, that people's expectations change and their behavior changes in a way that exacerbates inflation. So far, that hasn't happened and if you look at labor markets, even though we're looking at very tight labor markets in multiple countries, wages have not kept pace with inflation. And I think central banks by tightening monetary policy are, among other things, sending a signal that we're going to get this under control, and they're trying to anchor expectations of inflation. And evidently, they've done a pretty good job of that. So now, as they tighten monetary policy further with the goal of slowing economies, and maybe even engineering recessions, that with, (crossover talk).
Michael LeBlanc 32:00
With a soft landing, hopefully, I mean, this is art and science, right? I mean, try to tap the brakes enough to, (crossover talk) to not have us all,
Ira Kalish 32:07
I think they've given up on soft landing, to be honest, I think they're, they're, they're focused primarily on inflation. And by tightening monetary policy, adds to that and all the other factors I mentioned, changing consumer behavior, change and supply chains, those things should in fact, get inflation down. So, if you look at say, the US where the most recent number, for August was year-over-year inflation of 8.3%. That's really high, but it's down from 9.1%, two months earlier. My expectation is by the end of 2024, inflation will be under 3%. So,
Michael LeBlanc 32:49
Under 3%, by the end of 2024.
Ira Kalish 32:52
Right. So, we're gonna need to get this down. I think, I mean, it's all, it all depends on events and things could change that would make my prediction wrong. So, but I'm more confident about that prediction than I am about whether or not we'll have a recession. I think, you know, obviously, central banks would like to do this without creating a recession. That's the challenge. But they may fail at that. Our own Deloitte Chief Economist in Canada, Craig Alexander is now forecasting that Canada will have a recession. And here in the US, our view is that, at least in the coming year, there's maybe a one in three chance of recession. With that probability rising, the longer you go out in time. So, there's a substantial recession risk. I mean, right now, economies here in North America are actually still growing. But because of what central banks are doing, we've already seen a substantial deceleration of economic activity. And so we may be getting close to the point where activity starts to decline.
Michael LeBlanc 34:06
Let's talk about the, the, the phenomenon where we have these economic circumstances and the somewhat unusual, I think you tell me full employment. I mean, we've got, that you don't usually see those two things move together. So, what's your, what's your thinking around, you know, retailers everywhere are struggling to find. We're going to talk more about this, but they're struggling to find people to fill jobs. It's got to be a hit on productivity within the economy. What's your prognosis?
Ira Kalish 34:32
So, we saw in multiple countries during the pandemic, a drop in labor force participation, as well as a sharp drop in immigration. And those two factors have created a shortage of labor at a time when the economy is still reasonably strong. You know, why did labor force participation drop, some older workers decided to retire early, some parents dropped out of the labor force to take care of children who are not in school full time. And now even though they're back in school, those workers haven't fully trickled back into the labor force. Some people dropped out because of the skills mismatch. Maybe they lost jobs when retail stores closed permanently, and they didn't necessarily have the skills needed for the jobs being created. And then, of course, governments cut back on immigration, and the debt hasn't fully recovered. So, the end result is a severe labor shortage. And you would expect that that would lead to dramatic increases in wages. But that hasn't been the case overall, within some industries and some demographic cohorts, yes. But for the economy, overall, wages have been surprisingly tame. And I think that may reflect businesses taking the view that this inflation will be temporary. And they don't want to get stuck with permanently much higher wages. So, in many instances, they're offering retention bonuses or signing bonuses,
Michael LeBlanc 35:01
Sure, sure.
Ira Kalish 35:03
Or investing in labor saving or labor augmenting technology in order to boost the productivity of the existing labor force. But that is one of the conundrums for “We” economists to understand why, when there's a shortage, you're not seeing this increase in wages, that would normally be the case.
Michael LeBlanc 36:26
So, I want to hang on this whole labor issue because I get asked, you must get asked, where did everybody go? And you and I on the, on the chat we are having. When we were talking, when you were in Rome and I was in Vegas, we're talking about this kind of idea that I have five different things that contribute all the same time to this issue. So, I wanted to bounce those ideas off you. You've already mentioned the first one, which is retirement or early retirement. Now in Canada, Stats Canada released numbers in August 300,000 Canadians retire the most, in a 12-month period in history. I think there's some pent-up demand, so to speak, for retiring. I think some people put off retiring during the COVID era, because they said, well, I'm working on all my you might as well stick with it. It feels like some of that was going to happen anyway. I mean, I think back to Japan's aging population, you know, you're going to see more retirements. Are you, do you think that's a, a, would you rank that as a very important contributor to what's happening?
Ira Kalish 37:20
Yeah, I mean, we, we were already you know, we already have onerous demographics in terms of the aging of the population and, and the slow growth of the working age, population or even decline in it. So, it was, it was always going to be the case that employment growth would slow down because of demographics. But it wasn't necessarily the case that participation in the labor force would decline. But that happened for older workers. I think there are a number of reasons. I think during the pandemic, people were scared about transmission, for those people that didn't have the opportunity to work at home. People did see until the recent turnaround, they did see their portfolios rise in value, they saw their homes rise in value. They saved a lot of money during the pandemic, because there weren't a lot of spending opportunities. So, I think many people felt financially comfortable retiring earlier than they plan. And those people are not coming back. So, you asked, Where are they, they're home, or they're playing golf or something.
Michael LeBlanc 38:22
They've real- yeah, they've, they've had an epiphany that they better get on with life before, before. It's too late. Is there any evidence, I'll move on to the second one, which I have this idea that there was a lot of obviously government subsidies in Canada, we had the CERB when people were at home, and I think and I wonder if there's any evidence to support this, that people took the opportunity to upskill themselves? So, some of the service industries lost you know, you can't find, yeah, I keep saying when I was in Vegas, you know, many of the restaurants are only open three days a week, because they just can't find the people. And they're not coming, their worry is that they're not coming back, because they've kind of upskilled themselves. And now there's a bit of a, you know, with people retiring this kind of movement. Any, any evidence to this?
Ira Kalish 39:05
I don't know if they've upskilled themselves. I haven't seen evidence of that. I think a more likely explanation when it comes to service industries, like restaurants, is the lack of immigrants.
Michael LeBlanc 39:24
Okay.
Ira Kalish 39:25
I mean, I've seen data showing that the share of the working aged population that are foreign born has suddenly dropped and it's never dropped before. And that was because immigration was cut off. And some people who were first generation immigrants went back to where they came from, because they weren't given opportunities to work during the pandemic. And we saw that especially in hospitality, you know, restaurants, hotels. We saw it in agriculture, we saw it in construction and other industries as well. But this isn't talked about much in the popular press, and I'm not sure why but I think the lack of immigrants is a very substantial contributor to the labor shortage. And if this persists, it will contribute to slower economic growth.
Michael LeBlanc 40:09
And now that's a you know, in Canada, we, we slowed down, but then the government has really rapidly expanded, you know, not just accepting Ukraine, Ukrainian refugees, but I think we're up to 400,000 a year. I mean, the government's trying to make up, make up for a bit of lost ground. I mean, to some degree, it is become a more open place than, than the United States, for example, which feels like, yeah,
Ira Kalish 40:32
You know, yeah. No, the US is not an open place right now. And I think Canada, Canada for a long time has been more open to immigration than the US. And, and, and I'm glad to hear that there's an effort to restore the level that, that was lost during the pandemic. But that's not happening here. And I view that as a problem.
Michael LeBlanc 40:55
What do you think about the impact? This is one of my other ideas, now that people, not everyone, can work. The geography is, is now gone aside as, as one of the biggest constraints, right? So, that works for us and against us. I've talked to retailers who are based in smaller communities. They're benefiting, actually, quite significantly, because they can hire talent that is based anywhere in Canada. I have to think this is, I mean, at a very theoretical level, isn't labor mobility, productivity good. And I have to think it contributes to people saying, well, maybe I don't have to work in a kitchen, maybe I can work in a call center, but I'm really sitting at home and working in a call center. And, you know,
Ira Kalish 41:31
Right, (crossover talk).
Michael LeBlanc 41:33
Or wherever, anything behind that?
Ira Kalish 41:38
This is a source of debate. I mean, certainly, we seem to be moving toward a hybrid world where some people work at home, and some don't. And some people work part of the time at home and part of the time at an office or a facility. And there's a, and, and so you know, there's more flexibility, I guess. And for many workers, there's the opportunity to work from wherever they want to work. And there's a debate about what this means for labor productivity. On the one hand, if workers are happier in what they're doing and can use technology well, they may be more productive than they were before. On the other hand, productivity in the long run is driven by innovation, by new ideas, by ingenuity. And there's a good deal of evidence to suggest that that takes place often in the informal moments when people get together and exchange ideas. And if people aren't together physically, it's harder to do that. It's much harder to do that on a Zoom call than it is if you're sitting in a conference room together. Because,
Michael LeBlanc 42:56
Yeah.
Ira Kalish 45:57
If you're sitting even in the, the most boring meeting ever, in a conference room, at some point, you take a coffee break or a lunch break, and then you go outside and you say to your friend, oh, let me let me bounce this idea off of you. That doesn't happen in the, in the Zoom environment. So, I think we need a hybrid, in the sense, fine, it's okay to work at home. And there are some productivity benefits from that, (crossover talk).
Michael LeBlanc 43:12
Mobility has gotta be a big one, right? I mean, la-, you know, labor I, as I said, you can be anywhere, anytime and work anywhere, anytime. You're not any more restricted by where you are, right?
Ira Kalish 43:14
Right. But on the other hand, you know, I think it will still be important for people to get together periodically and share ideas. Human beings have a certain need for other human beings, I think. Now we're getting into the realm of psychology, which is not my (crossover talk) area of expertise.
Michael LeBlanc 43:39
But you ma-, you must be asked this question, you, but you must be asked this question by clients, because I think companies are trying to figure out well, I, it's not necessarily and sometimes it's hard to hire people to come into the office, but maybe we create events or institutions or opportunities for that kind of magic you're describing outside of the traditional workplace. Maybe we're getting together at more offsites or something. Are you seeing any evidence of that adaptation?
Ira Kalish 44:06
Anecdotally, yes. I see it in my own company. I mean, we're, even before the pandemic, we were a very fragmented organization. I always have worked at home when I wasn't traveling, I don't go to the Deloitte office in downtown LA very often. I don't really need to because most of the people I interact with are somewhere else. So, I don't need to sit in traffic all day just to sit at a desk, I can sit at a desk at home. But I mean, what, what I'm seeing with our firm is that we're, we're still having you know, we're back to traveling again. We're having in-person meetings so that we can get together and can exchange ideas. And can get to know each other. So, that allows for smoother working relations for us. And we're also back to traveling to talk to our clients again.
Michael LeBlanc 44:37
Yeah.
Ira Kalish 44:38
It's interesting that early in the pandemic, there was real fear that how are we going? We had a lot of work in the pipeline, we figured we could do the work but how are we going to sell new work if we're not walking the halls of our clients? And then, of course, the clients who aren't even in their offices, but somehow, we did. We did, actually quite well. So evidently, given the technology that exists, it's possible to do this. But I still think, I think we're moving toward a hybrid world, the real big question about that hybrid world is, what will it mean for urban centers? What will it mean for Office property? I think a lot of office property, rather than being offices where people have a fixed office, will be facilities, where meetings take place, and events take place. But it's hard to predict what this will mean for central business districts in their overall economic health and the smaller businesses that exist in those places that support office workers? I just don't know the answer to that yet.
Michael LeBlanc 46:05
I guess if only we had, we were cutting big fat checks back, back in the Go-go days, again, we'd have a different take on what's going to happen with all that. Let's, we're at 1:48. So, I just want to remind everybody, if they have any questions for Ira, just pop them into the chat. And we'll, I'll leave some time, at the end, we're kind of coming close to the end of our time. So, just a bit of a time check. And let's by, the fifth one. And let's not dwell on it. Because we're kind of short of time, I think, you know, COVID itself is still present. We talked about that. At the very beginning, I read a Wall Street Journal article that said something like 500,000 people are missing from the US job force, because of COVID. There's a million people killed by the, by, during the pandemic, and, and, you know, so, you know, we should probably acknowledge that and, you know, there's people missing from the workforce every day still. Fortunately, as we, as we said the, the more extreme outcomes seem to have been thankfully muted by vaccines and all those things. So,
Ira Kalish 47:03
But also keep in mind, not only did people get sick from COVID, and some still are. But during the pandemic, when peep-, when there were restrictions or mobility, a lot of people didn't address other medical problems, and, and ignored them. And as a consequence, a lot of people died or became sick from other factors that normally would not have led to severe illness or death. And that's probably still with us.
Michael LeBlanc 47:31
I guess, on the upside of, if you could say, of the COVID era, if you're in the wedding business right now, it's good to be in the wedding business for the next couple of years. And Ira, you know what that means, in the next couple of years after that, we're gonna have a baby boom, around the world, right.
Ira Kalish 47:45
Well, I don't know about that. Because birth rates around the world are surprisingly low, people get married, and then they, they, they're happy to just not have to deal with kids. They're just not ha-, they're not having a lot of kids right now, here in the US or in China. You know, it's interesting in China, over almost a decade ago, they ended the one child policy and they thought, Okay, this is a solution to our demographic problem. No, people aren't having more kids, they're actually having fewer kids than they did when the one child policy was in place. So, people got kind of used to it, I guess.
Michael LeBlanc 47:50
Well, you know, maybe, maybe the fact that more people can work from home and the nature of work changes, who knows? Maybe that creates an interesting dynamic.
Ira Kalish 48:22
I don't know, we’ll see.
Michael LeBlanc 48:24
All right let's spend the last kind of moments together talking about Canada. Let's focus back in Canada now. Now not unlike, in some ways England, we're getting a, starting to get a bit hammered a little bit by the strong US dollar. I can see, you know, we, we import so much goods, or we pay for the goods in US dollars. That's pretty, pretty meaningful. So, what's your, what's your outside-in prognosis for the Canadian economy?
Ira Kalish 49:01
Well, as I indicated, our Chief Economist in Canada is now forecasting recession, which I think makes sense. I mean, you're, what you're having in Canada is a significant tightening of monetary policy in order to quell inflation. And that will have negative consequences for credit markets and economic activity. And that comes on top of the loss of real income experience due to much higher energy and food prices. That also comes on top of the slowing of the US economy and the possible recession here, which has a big impact on Canada because the US is by far Canada's largest export market. And as you indicated, the rise in the dollar exacerbates the cost of imported commodities.
Ira Kalish 49:48
On the other hand, the drop in the loonie means more competitiveness for Canadian exports. So, that could help part of these, (crossover talk).
Michael LeBlanc 49:56
Counterbalances, yep,
Ira Kalish 49:59
Right and you know, as the Bank of Canada acts and as other factors take place, inflation should come down pretty quickly, I think. And once it does, the Bank of Canada can reverse course, and allow for an economic recovery. People worry a lot about recessions. And they should, because they're sometimes painful, especially for the people that lose jobs. But it's worth noting that most recessions are short lived. And if there is one in Canada, it will probably be short lived and relatively mild, and then there'll be an economic recovery. And I think it makes sense for businesses, at least if they're in a good cash position now, to plan for the recovery, not just simply plan for recession, because it will come. And there will be opportunities for stronger players, especially given that the weak tend to (inaudible) some of them tend to disappear during recessions. So, for the stronger players, there's an opportunity to gain market share.
Michael LeBlanc 51:05
We got a couple of questions from our audience. Thanks for the questions. I've got them both in the chat and the Q&A. First question. And I think this is a similar issue in the United States, that part of the immigration issue is the acragada-, accreditation. In other words, you know, you have someone who's a doctor in one place or a nurse in another place coming in, and there's a, there's a drag on the immigration because they wind up not being able to practice their trade, engineers or whatever.
Ira Kalish 51:32
Right.
Michael LeBlanc 51:33
Is that a, is that a consistent policy? Or is that on the upside is something that can, that can help move the economy forward? If we kind of speed up this? Have you seen any examples around the world where that, (crossover talk) that's helped them.
Ira Kalish 51:44
I don't know enough about that, to be honest. But I mean, certainly the fact that you wind up with doctors driving taxis, that's a loss of productivity, you know, not that there's anything wrong with driving a taxi, but a taxi driver will on balance be less productive than a doctor. And so it does make sense to try to find ways to accredit people with skills so that they can make a larger contribution to the economy. But even, even if they don't, just the fact that they're, they've come, adds to the number of workers and adds to economic output. So, it's, I think it's important to bring in immigrants. It's also worth noting, not just in Canada or the US, but around the world. Immigrants are by their nature, risk takers, they're taking a risk leaving everything behind. And risk takers are the kinds of people that are entrepreneurial. And the evidence suggests that in multiple countries, a disproportionate share of entrepreneurs are immigrants. They start businesses, they create jobs, they add to economic well-being. So, whatever they wind up doing, just the fact that they come is usually on balance a positive thing.
Michael LeBlanc 52:59
Let's, the other question is, is kind of and we'll end on this question. When is this all gonna get to normal? I mean, it's a funny question in one way, because what does normal look like? I guess the disruptions in some ways are kind of easing, supply chain disruptions are easing, they're not, they're not over. And then just to revisit your point about if we go into recession, your feeling isn't that it will, will not be a prolonged one. What's? So, basically our, our viewer is asking, you know, when can I get back to a normal life here with (crossover talk) normal, (crossover talk).
Ira Kalish 53:30
Probably never, (crossover talk) we're going to head toward a new normal, I mean, there, we've had major disruption and the world going forward will be somewhat different. You know, the labor force may be different. It may be more of a hybrid world, which technology has enabled. We've seen more geopolitical stress, and that's not likely to go away quickly. And so, there'll be different geopolitical relations and consequent impact on global business and supply chains. And then there's the big problem of climate change. This year, we finally saw for the first time significant economic disruption because of climate change itself. We had a major heat wave around the world this summer. The major impact was to lead, was a drop in water levels in multiple countries. And that meant, for example, in China, that hydroelectric power plants didn't have enough water so they couldn't produce power. The factories had to shut down because there was a shortage of electricity. In France, the drop in the water level led to half the nuclear power plants going offline, because they didn't have sufficient water to cool the nuclear power plants. And France relies heavily on nuclear power. This isn't going away, this is going to, (crossover talk).
Michael LeBlanc 54:55
And I saw in Germany, right some of the, some of the water levels are so low they couldn't get boats up and down, (crossover talk).
Ira Kalish 55:01
Right transportation has been affected too. That's true. And the irony here is that while it's important for us to move away from burning oil and gas and coal, and instead using nuclear power, and hydroelectric and so on, it's the climate change itself that disrupted the ability to produce that clean energy. Which is, again, ironic.
Michael LeBlanc 55:27
So, I guess we could have an entire other session just on the impacts of climate change. I was watching this great presentation. If you thought there was a 20% chance of this happening, what would you do? Even if you don't believe in, all the way, in climate change? I think it's a whole other topic. We just barely scratched the surface. I mean, you see, you see nations like China, seeding the skies to make rain, what could go wrong? Anyway, I (inaudible) this has just been a blast for me. And I'm sure for the audience it’s so informed, we've done an around the world presentation. This was just fantastic. So, I wanted to wrap up thanking everyone and all the attendees, of course, thank you for your generous insights and sharing. Be sure as we look to our next events, the Next Retail Matters Event, Will Demand Continue for Private Label, I think you would probably say yes, at least in the short term as economic belts get tightened a little bit. Ira, I can't thank you enough. I again, I could spend the entire afternoon chit and chatting with you. But I think you've got lots of things to do. So, once again, great to see you and thanks for joining me.
Ira Kalish 55:29
Thanks for having me.
Michael LeBlanc 55:32
Thanks for tuning into this special episode of The Voice of Retail. If you haven't already, be sure and click and subscribe on your favorite podcast platform so new episodes will land automatically twice a week. And check out my other retail industry media properties: the Remarkable Retail podcast, Conversations with CommerceNext podcast, and The Food Professor podcast with Dr. Sylvain Charlebois.
Michael LeBlanc 55:51
Last but not least, if you're into barbecue, check out my all-new YouTube barbecue show Last Request Barbecue with new episodes each and every week. I'm your host, Michael LeBlanc, President of M.E. LeBlanc & Company and Maven Media. And if you're looking for more content or want to chat, follow me on LinkedIn or visit my website at meleblanc.co.
Have a safe week everyone.
SUMMARY KEYWORDS
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