The North American economies have been dominated by two main themes over the past year: the weakeni...
The North American economies have been dominated by two main themes over the past year: the weakening US dollar and spiraling commodity prices, both of which negatively impacted the US domestic economy. There have been winners in the region too, however, especially the commodity-rich Canadian economy, which has profited from the price hikes; and the big US exporters, who have seen their competitiveness improve on the back of the dollar slide.
The US economy for the most part has been able to absorb the increase in oil prices, according to Norman Raschkowan, head of North American equities at Standard Life. The low interest rate environment and higher house values have helped fuel consumer spending and counteract, to some extent, higher energy costs. Although it has had some impact on airlines and the automobile industry, the US consumer is still holding up and supporting the US economy. It is likely the Fed will keep interest rates at fairly low levels to keep an environment that promotes growth.
For Canada, higher commodity prices have been especially positive for the economy. Raschkowan points out that Canada has an abundance of natural resources and has benefited from the rise in energy prices.
However, Tony Dolphin, director of economics and strategy at Henderson Global Investors, warns that the main concern for commodities in Canada is if China slows. China is a big player in this market and if there is a fall in the demand for commodities this may result in a loss of income for Canada.
One area that has benefiting the US economy has been the weaker dollar, points out Raschkowan. This has helped the export industry.
Raschkowan says: "The dollar is likely to drift lower to make manufacturers more competitive in the global market.
Multinational companies will have improved competitiveness and are likely to outperform in 2005. These companies have also been shifting production to Asia to produce a lower cost base."
However, Raschkowan warns a large proportion of the Canadian economy is dependent on trade with the US. The appreciation of the Canadian dollar is putting a strain on exports. He feels this would happen if the Canadian dollar were to go above 85 cents against the US. This would cause the economy to slow and have a big impact on employment growth.
According to Dolphin, the export industry across the border has been another driving force behind Canada especially in the car manufacturing area. Further appreciation of the Canadian dollar could put a strain in this area.
Although Dolphin feels the US economy's excesses, such as the large budget deficit and low savings ratio, are not there in Canada, he says that Canada is still tied to the US. If the US has a recession then Canada will have one via the export market.
For the US, according to Dolphin, the risk is that if inflation rises too fast the Fed would have to raise interest rates. This would cause weaker growth.
He says: "In the US, companies' cash flows are very strong at the moment. But, now the tax cuts have ended, the US needs money from cash flows to cycle around the economy. Cash flows need to be regenerated and companies need to continue to grow and hire more staff. Employment growth is needed for the economy. The main driver in the US is still consumer spending which continues to increase at a rate of 3%-4%."
Furthermore, an aggressive hike in interest rates in the US could also cause the Asian economies to stop financing its current account deficit, points out Dolphin. This could happen if Asia feels it has become more self-sufficient and does not need the US and can afford to let its currencies rise. However, the risk of this occurring is presently only small.
There could also be risks to the Canadian economy if its central bank has to raise interest rates faster than expected.
According to Raschkowan the low interest rate environment in Canada has also helped inflate house prices and consumer spending. Although Canadian house prices are not as robust as the US, prices have been increasing but the environment is favourably supporting the economy. An aggressive hike could have an impact on the Canadian economy.
Raschkowan is forecasting 3% growth in the US and Canada.
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