There has been positive news for North America with GDP figures being revised upwards and an increa...
There has been positive news for North America with GDP figures being revised upwards and an increase in job growth.
However, not all parts of the economy are performing well. In Canada, exports are struggling because of the surging Canadian dollar and profit margins in the US pharmaceutical industry have been weakened because of cheap imports from Canada.
Gil Knight, senior fund manager at Gartmore, says: "The US economy looks good at the moment. GDP estimates have been raised for this year from around 4.2% to 4.8%. The numbers in terms of industrial production are continuing to show signs of improvement. Housing starts are up 6.4% that was higher than expected, and even with higher mortgage rates do not see any real sign of a slowdown. Mortgage rates would have to get to 7% and above for there to be any real noticeable difference."
Retail sales have also been stronger than anticipated. For example, Wallmart and Target have both performed well, points out Knight. Consumer spending continues to grow as well as personal income. Job growth has increased which means more money in people's pockets. Although interest rates will start to rise because of inflationary pressure in the housing and energy markets, Knight does not think this will kill off economic recovery.
Norman Raschkorman, manager of North American equities at Standard Life, also believes the US economy is quite favourable at the moment. The US should have an extended cycle of growth because of low interest rates. The latest employment figures show a pick up in growth. In March, US employment rose by 308,000.
"Retail sales are also showing signs of improvement. Earnings have been better than expected. However, management is still cautious about outlook because of the dollar," comments Raschkorman.
However, Steve Andrew, economist at ISIS, warns: "There are very good reasons not to get carried away by the March data.
To get bullish on the US labour market we would need to see a more widespread improvement that not only includes the household survey but is also reflected in a rise in the number of hours worked by the existing workforce which is still showing very little sign of improvement. The stimulus to fresh labour demand has peaked."
Andrew thinks if we were to see non-farm payroll growth sustained at the current rate, this would only just provide the income growth required to meet the current rate of spending growth in six months' time. In the mean time, a further source of income will be required if consumption growth is not to decline. The past year has had considerable assistance from mortgage refinancing and tax cuts. With such stimulus faded, we still see the risks to the downside for personal consumption growth in the near term."
According to Raschkorman, the 15% rise in the value of the Canadian dollar has made it more difficult for the manufacturing sector to export goods.
However, Raschkorman says: "The government budget is in better shape in Canada than in the US. The Canadian government has been fiscally prudent and benefited from low interest rates and the country has not had the same amount of tax cuts as the US."
According to Raschkorman, the commodity sector is performing well in Canada on the back of rising oil prices. Retail has also improved because of job growth and the good interest rate environment. Housing prices have been robust giving people more money to spend. Banks have been doing well because of increased demand for loans by consumers.
While Knight also thinks the Canadian economy is performing well, he warns the export of Canadian drugs to the US is hurting the profit margins of US companies.
Raschkorman says: "Pharmaceuticals still remain weak in the US because of regulatory issues by the government and the pricing environment. Products are being imported in from Canada as they are simply cheaper."
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