Growth in the US in 2003 is likely to be respectable rather than disappointing, according to Andrew ...
Growth in the US in 2003 is likely to be respectable rather than disappointing, according to Andrew Clare, financial economist at Legal & General.
Clare believes growth will be boosted from further increases in government spending, while the Federal Reserve will keep monetary policy loose for most of the year.
'Consumer spending will be respectable, buoyed by the mortgage refinancing deals many US citizens have taken, made possible by low interest rates and a robust housing market,' he says.
As a result of the monetary and fiscal policy stance taken, he adds, the US has seen off any risk of a double-dip in economic activity.
The main difference between 2002 and 2003 for the US economy will be the recovery in corporate spending and an associated increase in profits, he argues.
'The one piece of the US economy that was missing last year was investment spending,' Clare says. 'We think this will return in 2003. However, the US economy will be sanguine and will not get back to the growth witnessed in the late 1990s.'
Since the fourth quarter of 2001, growth in the US has returned to about 3%, which Clare believes is largely attributable to strong government expenditure. However, investment spending has collapsed, which is why the US economy has only been growing at around the trend rate.
Reports of the weakness of the US consumer have been overdone, Clare says, with spending buoyed by the number of consumers that have been re-financing their mortgages, so it will not be a drag on growth going forward into this year.
Chris Tracey, investment director at JP Morgan Fleming, predicts that the US is set to underperform this year.
He says that, although it is likely to be the powerhouse behind the increase in global growth in 2003, US stock markets are likely to underperform, as its earnings forecasts are unrealistically high.
Tracey adds: 'The US economy is in the midst of a soft-spot, as the Fed said when it lowered interest rates in early November.
'The key risk is that increased corporate layoffs will hurt consumers, just as the enthusiasm for mortgage refinancing is starting to decline and the US perhaps engages in a war with Iraq. Hopefully, the recent Fed easing will boost confidence sufficiently.'
If the recent stock market rally is to be sustained, Tracey says, investors will want to be reassured a double-digit profits recovery is achievable next year.
He adds: 'In the face of price deflation for most manufactured goods, our own profits estimate for 2003 is year-on-year growth in the low teens, somewhat below consensus.
'Equity valuations are cheap relative to bonds but, on a P/E basis, a lower-than-expected rise in the earnings could limit room for further growth of the price.'
Over the year to 16 December 2002, the S&P 500 fell 21.21%. The index started 2002 at the 1,150 level, hitting its high of 1,172 on 4 January. From then to 16 December 2002, it fell to 910, hitting its low of 776 on 9 October.
Government spending likely to increase.
Recovery in corporate spending expected.
US has seen off the risk of a double-dip.
Earnings forecasts aare unrealistically high.
Corporate layoffs will hurt consumers.
Mortgage refinancing is starting to decline.
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